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Saturday, July 12, 2014

OPR Hike: How will it affect Malaysian?



Bank Negara Malaysia (BNM) has raised the overnight policy rate (OPR) by 25 basis points to 3.25%. This is the first hike in the OPR since May 2011. The decision was made at the Monetary Policy Committee (MPC).

BNM also released a statement, saying "The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively."

OVERNIGHT POLICY RATE? WHAT IS THAT?


Have you ever wonder what is this OPR that these people are talking? I used to have big difficulty understanding the business and financial vocabulary.

In short, OPR is the interest rate at which a bank lends to another bank, which is set by the BNM. 

This rate has an effect on the country's employment, economic growth and inflation. Generally, it is an indicator of the health of a country's overall economy and banking system.






WHY IS THERE A HIKE?

There is a lot of reason for the increase in the OPR but there are a few reasons on how the economists view the hike.



Economists generally view the hike in the OPR is an attempt by the Monetary Policy Committee of a country to tackle the inflation, based on the scenario where growth is too strong and fear that imbalances in the system could occur because of it. 

Latest economic data has showed that Malaysia is continuing to grow and there is strength in the exports and private sector in the country. There is an increase expectation on the sustainability of the growth in the country.

The increased OPR is aimed to normalize the current monetary conditions and to mitigate the risk of the broader economic and financial imbalances that could jeopardize and hurt the country's economic growth.

According to AllianceDBS, the increased of 25 basis points should be manageable and not affect the borrowers' ability to service higher interest cost, but a higher increase could create risk of a higher non-performing loan (NPL) and provisions. Therefore, many welcome the increase of the 25 bps in the OPR at this time as a good move by Bank Negara. 


NOW THE BIG QUESTION: HOW WILL IT AFFECT YOU??

Well, it will definitely affect the interest for your loan.

Any changes on this will definitely impact the floating rate loans which are common for mortgages. While the effect of the new lending rate framework is still unknown, an increase in OPR will likely have the same effect, as banks would normally adjust their lending rates by the similar quantum when OPR changes. 

Historically, bank will normally raise about 20 to 30 bps for a 25 bps hike in OPR. Here is the difference on your mortgage loan, assuming the bank increase by the same 25 bps. (I understand that the BLR will increase by the same 25 bps and will take effect on 16 July...don't take my word for it. Wait for the announcement).

The old rate at BLR: 6.6



If you look at the old rate, with a BLR-2.4, your monthly installment for a RM400k loan with a tenure of 30 years: RM1,956.07

After the increase:




With the new rate, your monthly installment will be RM2,014.88. There is only an increase of RM58.81, which is not a lot. But if you look at the overall interest paid. There is an increase of about RM21k. Of course, the amount is not a lot over the period of 30 years.

Borrowers generally will not be impacted by this increase severely. 

THE IMPACT ON MALAYSIA will be a positive one. Raising the OPR rate gives confidence to the foreign investors to come to Malaysia. This move should benefit the banks as well. Some reports show that Alliance Financial Group (AFG), Maybank and many others will benefit most from it. The exception would be the Ambank and Affin which has a large share of fix rate loan.

It is expected that the OPR will remain unchange for the rest of 2014. This increase will definitely pinch consumers' pocket slightly (myself included) but I believe it's the right move taken at the right time with the right rate that is not too heavy to Malaysian.

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