An analyst says Bank Negara Malaysia (BNM) had no strong reason to raise the overnight policy rate (OPR) to 2.0% as announced on Wednesday, as the move will not affect inflation, a matter of concern in other countries.

Economist Geoffrey Williams said the central bank’s mandate was to maintain price stability, support sustainable economic growth, and support the stability of the financial system.

“Price stability is normally taken as inflation of 2 to 3% which we currently have,” Williams, of Malaysia University of Science and Technology, told MalaysiaNow.

“The economy is in the first stage of recovery but this is still tentative and the financial system is very stable.

“So there is no real reason within the mandate to raise interest rates at this stage,” he said, adding that higher interest rates would have no effect on the prices of oil, food or utilities – the factors currently behind the inflation pressures.

BNM raised its key interest rate yesterday for the first time since 2020, lifting its main rate 25 basis points to 2% despite most economists having predicted no change until later in the year.

It was the first hike since July 2020, when rates were slashed to a historic low to combat the impact of the Covid-19 pandemic.

This comes as countries around the world struggle with inflation, including the US where the Biden administration is taking heat for the increase in prices of goods and services.

Williams said the increase in OPR would make the cost of borrowing more expensive for corporate and consumer borrowers.

This in turn might have an effect on holding back consumption, investment and growth, he said.

“Since both companies and consumers have more debt due to the lockdowns, both corporate and consumer costs will rise,” he said.

“There will be less investment and less consumption, which will damage growth. The only hope is that 25 basis points is too small to have an effect on the real economy, but we must wait and see.”

Bank Islam chief economist Mohd Afzanizam Abdul Rashid however said the main context of BNM’s decision to raise the OPR was to gradually remove the monetary policy accommodation.

He said the country had been severely affected by the pandemic throughout the past two years, during which time the monetary policy administered by BNM had been geared towards supporting the economy.

“Such policy directives were manifested in the reduction of the OPR from 3% at the end of 2019 to 1.75% by July 2020.

“This was the lowest OPR level in history,” he said, adding that BNM’s decision to raise it to 2.0% came amid signs of improving economic activities.

The unemployment rate, for example, came down from 5.3% in May 2020 to 4.1% as of March this year.

The Consumer Sentiment Index meanwhile rose to 108.9 points in the first quarter of 2022 – the highest level since the second quarter of 2018.

Passenger traffic numbers at airports likewise increased to 8.32 million in the first three months of the year, compared to 1.67 million in the first quarter of 2021 – a jump of 399.6%.

Banks in the country meanwhile have begun announcing an increase in base lending rate (BLR) – Maybank, for example, raised its rate to 2%.

Williams said the only justification for higher rates was the growing interest rate differential effect, due to higher federal reserve and regional rates.

“However, chasing exchange rates with interest rates is very bad policy and outside of the BNM mandate,” he said.

“If higher interest rates damage growth and confidence, they will be counterproductive and the exchange rate will continue to weaken. It will not reduce inflation in the short term, but will make borrowing more expensive.”

He said BNM should monitor the increase in BLR by local banks, adding that the central bank could be expected to continue raising the OPR in the near future.