Overnight Price Rate (OPR): What Should You Know
Key points
- Malaysia’s overnight policy rate (OPR) is an important part of the country’s monetary policy.
- The overnight interest rate set by our central bank, Bank Negara Malaysia (BNM), determines the rate of interest of borrowing for financial institutions overnight.
- The objective of the OPR is to help maintain stability in our financial system.
Malaysia’s overnight policy rate (OPR) is an important part of the country’s monetary policy. It can have a wide range of impacts on different measures, including deposit rates and lending ones.
Recently, Bank Negara Malaysia has raised their overnight policy rate by 25 basis points to 2.5% on Thursday (8th September). They have decided to start normalizing monetary policy for country economic growth and counter economy inflation.
The recent changes in the overnight policy rate have a big impact on Malaysia’s economy. This article will talk about recent adjustments made with Malaysia’s OPR rate and how it affects Malaysians.
What Is Overnight Price Rate (OPR)?
The Overnight Policy Rate is a key metric in understanding the economy of any country. It has been widely studied by economists and financial experts, as it can have significant effects on our money supply which then translates into changes to inflation rates or economic growth for instance.
The overnight interest rate set by our central bank, Bank Negara Malaysia (BNM), determines the rate of interest of borrowing for financial institutions overnight. The amount of cash in a bank is constantly changing, depending on how much people borrow and deposit daily. When OPR is lowered, other interest rates will be guided accordingly, and vice-versa.
For example, if most people decide to take out money from the bank to grab Blackpink concert tickets on the same day, the bank will need to borrow money from another bank to keep appropriate cash reserves.
In order to keep the banking system liquid and stable, banks that have larger amounts of cash tend to lend to banks with a cash shortfall. An easy explanation is to imagine going to the restaurant and realizing you forgot to bring enough cash for a meal, therefore asking your friend to borrow you and pay them back the next day.
Why Is OPR Important?
It might seem like clever cash juggling, but the need to lend cash between banks is an established and important part of a well-functioning financial system.
Lending is an important part of the banking industry, which means that banks need to maintain a healthy cash reserve in order for them and their customers to stay active. There are also liquidity requirements needed to meet set out by BNM. This is the amount of money that banks are required to keep in reserve, known as reserve requirement.
The framework of OPR provides banks with a stable source for cash, which ensures monetary direction on the national level. Therefore, changing the OPR rate will have a domino effect on other aspects outside just lending rates.
How OPR Affects Malaysia Economy?
OPR revisions are geared towards achieving an optimum level for the economy. The direction of OPR, whether going downward or upward, depends on current economic conditions and its outlook.
When the economy grows at a slower rate, banks will lower their interest rates in order to attract consumers and businesses with money available for borrowing. This stimulates increased spending which leads directly into higher economic growth, therefore reaching an optimum level faster.
When the economy grows at an accelerated rate, this number will be revised up and higher interest rates ensure that consumers pay for their borrowing costs which makes it more expensive than before so there’s less spending on goods or services. This slows down spending in different sectors which could prevent economic overheating.
Verdict
The objective of the OPR is to help maintain stability in our financial system. The economy of a country is dependent on the health and stability in its financial system. It’s used by monetary policymakers to manage money supply, which affects employment levels across countries through its effects on economic growth or inflation.
The best way to save money is by making sure you’re getting the most out of your loan. This starts with understanding how different interest rates work and then strategically reallocating any extra funds toward repayment ahead if needed! Read our article here to understand how to overcome the financial crisis.
