MONETARY POLICY IN MALAYSIA: OVERNIGHT POLICY RATE (OPR)
TABLE OF
CONTENT
1.0 INTRODUCTION 3
2.0 NEWS ARTICLE SUMMARY 3
3.0 EFFECTS OF OPR ON MALAYSIA’S ECONOMIC
GROWTH 5
4.0 EFFECTS OF OPR ON RATE OF UNEMPLOYMENT IN
MALAYSIA 7
5.0 SUGGESTIONS
TO BOOST ECONOMIC GROWTH USING MONETARY POLICY IN MALAYSIA 9
5.1 Rate
of Fixed Required Reserves 10
5.2 Open
Market Operations 10
5.3 Moral
Persuasion 11
5.4 Monitoring
Bank’s Portfolio 11
6.0 CONCLUSIONS 12
1.0
INTRODUCTION
Monetary policy is guidelines that provide the monetary authority of
a country in regulating the supply of money and to stabilize the growth of
economy (Friedman, 1968). In Malaysia, Bank Negara Malaysia (BNM) conduct
monetary policy based on S.22 of Central Bank of Malaysia Act 2009 by influencing
the level of interest rates that borrowers have to pay on their loans and
depositors earn on their deposits. During the peak of economic overheating and
when the threat of inflations high, monetary policy will be tightened by
withdrawing fund from the banking system and raising interest rates. The higher
interest rates will encourage people to save more and spend less. It would also
make it more expensive for people to borrow money. This will cause consumption
and investment to slow down to a level that is more sustainable and reduce the
prospect for high inflation. Conversely, when economic conditions are weak,
fund will be injected into the banking system to reduce interest rates,
spending and borrowing would increase. The resulting increase in consumption
and investment would stimulate further economic activity, leading to higher
income, employment and economic growth.
To give a clear explanation on how monetary policy in Malaysia and
its effects on economy growth rate and unemployment rate, this assignment will
discuss about one monetary policy in Malaysia by referring to one local news
article. The article which is publish in The Star Online, under the title ‘BNM
cuts interest rate to 3%’ is reporting about the Bank Negara decision to reduce
the Overnight policy rate (OPR) by 25 basis points to 3% in 2016. Important
macroeconomics variables will be highlighted in the chosen article and this assignment
will also discuss the impact of the monetary policy variables highlighted in
the article pertaining to Malaysia’s economic growth rate and rate of
unemployment.
2.0
NEWS ARTICLE SUMMARY
As reported by Joseph Chin (2016), in The Star Online on 13th
July 2016, Bank Negara Malaysia (BNM) has unexpectedly reduced the Overnight
policy rate (OPR) by 25 basis points to 3% at its Monetary Policy Committee
(MPC) meeting citing rising risks from Britain's exit from the European Union. This
move could see banks lowering their lending rates and making it cheaper and
companies to take loans. Correspondingly, the saving rates could also go down.
The overnight policy rate is an overnight interest rate set by BNM
used for monetary policy direction. It is the target rate for the day-to-day
liquidity operations of the BNM. OPR is the interest rate at which a depository
institution lends immediately available funds (balances within the central
bank) to another depository institution overnight. The amount of money a bank
has fluctuates daily based on its lending activities and its customers’
withdrawal and deposit activity, therefore the bank may experience a shortage
or surplus of cash at the end of the business day. Those banks that experience
a surplus often lend money overnight to banks that experience a shortage so the
banking system remains stable and liquid. This is an efficient method for banks
around the world to practice 'Accessing short-term financing' from the central
bank depositories. The interest rate of the OPR is influenced by the central
bank, where it is a good predictor for the movement of short-term interest
rates.
In Malaysia, changes in the OPR trigger a chain of events that
affect the base lending rate (BLR), short-term interest rates, fixed deposit
rate, foreign exchange rates, long-term interest rates, the amount of money and
credit, and, ultimately, a range of economic variables, including employment,
output, and prices of goods and services which is the micro and macro factors
on the economic. The new base rate (BR) framework encourages greater
transparency from banks and will enable customers to make better financial
decisions. Previously, calculations of BLR lacked transparency and some banks
were lending below the BLR to attract customers and boost loan growth. Under
the new system, customers cannot borrow below the base rate. The BLR is usually
adjusted at the time in correlation to the adjustments of the OPR which is
determined by Bank Negara Malaysia during one its monetary policy meetings. For
this case, Monetary Policy Committee (MPC) meetings.
The article also reported the official statement from BNM which
justifying the move to reduce the OPR. According to BNM, the action is in
tandem with the global economy continues to record growth at a more moderate
pace, across and emerging market economies.
BNM also stressed that in Asia, persistent weakness in the external
sector has weighed on growth, although demand remains supportive. Looking
ahead, there are increasing signs of moderating momentum in the major
economies. Thus, the reduce will be the catalyst for Malaysian economic growth
amid the decision of European Union (EU), in United Kingdom Brexit.
Lastly, BNM believes that the OPR reduce will bring advantage to
Malaysia economy as domestic demand continues to be the main driver of growth.
Private companies will be supported by growth in income and employment, and
measures implemented will prosper the economic growth.
3.0 EFFECTS OF OPR ON MALAYSIA’S ECONOMIC GROWTH
According to the statement released by BNM in the article discussed
above, the OPR was reduced in light of the rising risks from Britain’s
withdrawal from the European Union (EU), also known as Brexit. The central bank
decided to cut the rate due to the uncertainties in the global environment,
which could negatively impact Malaysia’s growth prospects. The rate reduction
consequently also lowered inflation forecasts for this year. Inflation
forecasts are lowered to 2% to 3% in 2016, compared to an earlier projection of
2.5% to 3.5%, and as expected to continue to remain stable in 2017.
Generally, the news of OPR reduction gave the stock market a boost,
especially property counters which had been sluggish in 2016. After the
announcement of the OPR cut, the FBM KLCI closed up 6.42 points or 0.39% to
1,660.39, led by UOA Development REIT, which jumped 30 sen to RM2.49 with 7.50
million shares done.
The OPR cut also lent support to the Malaysia Ringgit, which has
jumped to 3.96 to the US dollar, and expected to strengthen further to around
3.95.
Against the Singapore dollar, the ringgit rose to 2.9403/9449 from
2.9446/9492, while it improved against the yen from 3.8039/8098 to 3.8015/8081.
On the other hand, the ringgit rebounded higher against the British pound from
5.2637/2715 to 5.1967/2049, but eased against the Euro to 4.3940/4008 from
4.3889/3960 in the week when the OPR cut is announced.
Banks will likely be negatively impacted by the BNM’s decision, with
the already challenging economic environment. Their margin will be further
compressed with the lower benchmark interest rate.
However, according to Kenanga Research, Malayan Banking Bhd
(Maybank), AMMB Holdings Bhd (AmBank) and Affin Holdings Bhd are likely to be
the least affected by the downward revision in the OPR. These banks are
believed to be able to mitigate this impact better, because their fixed rate
lending comprises around 30% of their total loan portfolio (versus the industry
average of 24%).
Thus, it is not surprisingly to see another OPR cut in the same year
as the moves clearly give a boost to Malaysian economy. This is because If
economic growth continues to slow more than expected, this may cause the
central bank to reduce the OPR by another 25bps in the next meetings.
Though the reduction in OPR comes as a surprise, it does mean more
disposable income for consumers. However, with the current uncertain economy in
2016 the OPR cut is seen as justifiable as it is the only measures that can be
taken to correct the slow growth of Malaysian economic in 2016.
As the result, Following the OPR reduction, there was an immediate
and complete pass-through to interbank rates, with the 3-month KLIBOR (Kuala
Lumpur Inter-Bank Offered Rate) declining by 25 basis points the next day. This
consequently led to lower lending rates. The weighted average Base Rate (BR) of
commercial banks declined by 22 basis points by end-August. Correspondingly,
the weighted average lending rate (ALR) on outstanding loans was lower by 15
basis points in the same period.
Since the adjustment, BNM assessed that the monetary policy stance
has remained consistent with the macroeconomic outlook and kept the policy rate
unchanged for the rest of the year. The domestic economy remained on track to
expand as projected for 2016 and 2017. While the baseline estimate was for a
slight improvement in global growth in 2017, the downside risks remained
elevated following uncertainties over the growth momentum, policy shifts in
major economies, unresolved issues post-Brexit and policy uncertainties arising
from the outcome of the US presidential election in November. Global financial
markets remained susceptible to heightened volatility amid setbacks and shifts
in investor sentiments. Nevertheless, the BNM acknowledged that there were
signs of positive developments, notably the prospects of a shift towards fiscal
support for growth in the advanced economies.
4.0 EFFECTS OF OPR ON RATE OF UNEMPLOYMENT IN MALAYSIA
In a country, there will be unemployment. Full employment is
difficult to achieve. OPR as a Monetary Policy can be used for achieving full
employment. If the monetary policy is expansionary then credit supply can be
encouraged. It could help in creating more jobs in different sector of the
economy (Amassoma & Esther, 2015). As we all know, the purpose of
expansionary is to avoid unemployment by decrease in interest rate in order to
make easy credit.
In order to avoid unemployment from raising, BNM will using easy
money policy which increase the total supply of money in the economy more
rapidly than usual by lowering interest rate in the hope that easy credit will
entice business into expanding (Loganathan, Yussof & Kogid, 2012). One of
the policy is OPR.
Following the OPR cut, unemployment Rate in Malaysia decreased to 3.20
percent in February of 2017 from 3.30 percent in January of 2017. Unemployment
Rate in Malaysia averaged 3.31 Percent from 1998 until 2016, reaching an
all-time high of 4.50 Percent in March of 1999 and a record low of 2.70 Percent
in August of 2012. Unemployment Rate in Malaysia is reported by the Department
of Statistics Malaysia.
From Bernama, February 21, 2017, Malaysia will enjoy the full
employment when its unemployment rate for December last year fell to 2.9% from
3.5% a month earlier. The unemployment rate was also lower than the 3.3% posted
in the same month in 2012. The number of employed and unemployed persons
recorded a decline of 131,400 and 59,600 persons to 13.55 million employed and
425,000 unemployed persons respectively in December last year. the labor force
participation rate eased 1.3% to 13,973,800 persons in December last year from
14,164,800 persons in the previous month. Year on year, it rose by 4.8% from
13,332,100 persons recorded in December 2012.
From the point, other aspects namely foreign workers, Unemployment
as damaging issue in Malaysia Economic during times of Asian Crisis, the number
of foreign workers in Malaysia has arisen up from an 850,000 people in 2001 to
1, 470, 00 people in 2004 and calculated to be 2,045,000 in 2007 and nowadays
it reaches to be 2, 7 million foreign workers. Considering that 1,000,000 of
foreign workers in manufacturing sector, which can cover up two thirds of the
manufacturing sector 1.4 million work-forces in Malaysia. Its high correlation
and presence had become the reason of Malaysia’s low wage architecture within
last one decade. However, the existence of foreign labor in Malaysia had
successfully kept up and managed the unemployment rate become stable and
starkly even lower within last one decade expected range of 3% to 4% annually.
The presence of more than 2.7 million workers in Malaysia had become
a pertinent issue which effected the economic growth. According to Firman Shah
(2012), he had mention the presence of foreign worker had omitting and
smoothening up labor shortages in certain areas of work in Malaysia. They had
played complimentary roles to domestic labor in covering up and fulfilling the
demand for labor market in Malaysia which help to stable the unemployment rate
and fluctuates range between 2.9% to 3.6% per year within last one decade (The
Composition of Malaysia Population 2010)
For monetarist, the presence of foreign worker had given effect to
the unemployed graduates which later become a worrying trend to Malaysia.
However, during financial crisis, the total retrenched workers are total
majority workers which argue the displacement of them.
5.0 SUGGESTIONS TO BOOST
ECONOMIC GROWTH USING MONETARY POLICY IN MALAYSIA
Monetary policy is guidelines that provide the monetary authority of
a country in regulating the supply of money and to stabilize the growth of
economy. Thus, in implementing a good monetary policy, there are few factors
that can need to be considered.
In this chapter, we will look into how can the government boast our
economy by using monetary policy. We will discuss about 4 potential
recommendation that are able to help further boast the Malaysia Economy Growth
and push the country to achieve more economical success in the future.
5.1 Rate
of Fixed Required Reserves
BNM may require Commercial Banks in Malaysia to hold a fraction (or
a combination) of their deposit liabilities (reserves) as vault cash and or
deposits with it. Fractional reserve limits the amount of loans banks can make
to the domestic economy and thus limit the supply of money. The assumption is
that Commercial Banks generally maintain a stable relationship between their
reserve holdings and the amount of credit they extend to the public.
When prices are rising, the central bank raises the reserve ratio
(Karim, 2012). Banks are required to keep more with the central bank. Their
reserves are reduced and they lend less. The volume of investment, output and
employment are adversely affected. In the opposite case, when the reserve ratio
is lowered, the reserves of commercial banks are raised. They lend more and the
economic activity is favorably affected.
In order to stimulate positive growth in the economy the government
will have to lower the rate of fixed required reserves, as this rate has an
inverse relationship with the total money supply in the market. So, when the
rate of required reserves get lower the total money supply in the market will
increase. The formula for Money supply under this rate of fixed required
reserves is as follows:
Money Supply= 
× initial deposit
× initial deposit
5.2 Open Market Operations
When BNM buys, or sells securities to the banking and non-banking public
(that is in the open market). Aside from Cash reserve, commercial banks are
also required by BNM to own liquid asset or securities sell by it. One such
security is Treasury Bills. When the Central Bank of Malaysia sells securities,
it reduces the supply of reserves and when it buys back securities it will
increases the supply of reserves to the commercial banks, hence impacting the
supply of money. This requirement was set to help further control and stabilize
the Malaysian economy.
Generally, Open market operations is defined as the sale or purchase
of securities. As it is known that the credit creating capacity of the
commercial banks is dependent upon the cash reserves of that particular bank.
Hence, the BNM is capable of controlling the credit in the market as well as
the money supply of the market by changing the base of the credit-creation by
the commercial banks. If the credit is to be decreased in the country, the
central bank begins to sell securities in the open market. This will result to
reduce money supply with the public as they will withdraw their money with the
commercial banks to purchase the securities. The cash reserves will tend to
diminish. This happens in the period of inflation. During depression when
prices are falling, the central bank purchases securities resulting in
expansion of credit and aggregate demand.
5.3 Moral
Persuasion
The Central Bank of Malaysia is responsible for issues licenses or
operating permit to Commercial Banks and also regulates the operation of the
banking system. It can, from this advantage, persuade banks to follow certain
paths such as credit restraint or expansion, increased savings mobilization and
promotion of exports through financial support, which otherwise they may not
do, on the basis of their risk/return assessment.
In the recent years, this usage of moral persuasion has become a
popular tool of credit control. It is a general term describing a variety of
informal methods used by BNM to convince commercial banks to behave in a
particular manner that going to generate positive gain for all parties in the
society better. The Moral persuasion can take in the form of either Directive
and Publicity.
5.4 Monitoring
Bank’s Portfolio
Sometime the problem we have in our economy is that the banks in Malaysia
only like to borrow money to certain groups of business man only because of
their stable and traditional way of business nature. If this is left it will
impact the healthy growth of the nation economy as a whole as other industry
such as renewable technology, technology development, online businesses that
might only see profits in some years to come cannot progress as they cannot
attain loan from bank. That is where BNM come in, the BNM must set the
guideline and guide.
To stimulate positive economic growth, the government must direct
the commercial banks in the country to provide sufficient money supply across
all industries and sectors (Schiller, 2016) so that the Malaysia economy can
grow positively with balance. For instance, the agriculture industry would
obtain the same growth rate as heavy industrial sector in our economy hence
enable it sustain the growing of our overall economy. It is very important that
the government can strike this balance among all the sectors in the economy so
that our growth can be sustainable and progress further in the future.
6.0 CONCLUSIONS
Monetary policy play important role to implement in economic growth
by stabilizing in influencing through a number of channels. For example, in
price stability, by increasing in price level achieve is adjudged substantially
to be a monetary phenomenon, monetary policy uses its tools to effectively
check money supply with a view to maintaining price stability in the medium to
long term. The expectation in economic activities will be higher and contribute
to higher consumer spending and attractive companies’ investment by cut
interest rate to make the cost of borrowing, resulting higher investment
activity and the purchase customer durables.
As discussed in previous chapter, OPR is known as a monetary policy
in Malaysia. It also used for monetary policy direction. The OPR is interest
rate at which a bank lends to another bank, which is set by BNM. This rate has
an effect on the country’s employment, economic growth and inflation. It is an
indicator of the health of a country’s overall economy and banking system. The
exact mechanics of OPR can be seen on how BNM sets the rate that is consistent
with the long-term goals of stable prices (about 3% inflation in Malaysia’s
case) and economic growth at full employment. Assuming the OPR is higher than
before, than BNM needs to reduce the supply of money in the system. This
relative scarcity will increase the market price for overnight deposits.
The OPR can be seen as the right tool to correct Malaysia’s economic
growth. It is a sensible tool to adopt the wait-and-see approach if performance
of the economy does not stray too far from forecasts.
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