Hiking OPR again won't stop inflation, experts say

A former banker has warned that any move to further increase the overnight policy rate (OPR), which the central bank raised several times already last year, will not resolve the country's inflation.

Muhammad Zahid Abdul Aziz, formerly with Bank Islam, said that Bank Negara's manipulation of the OPR rate for this purpose would be pointless. 

"We are operating in a naturally inflationary monetary and banking system," he told MalaysiaNow. 

"Secondly, we must recognise that banks are not neutral entities that move money from surplus units to deficient units in the economy." 

Inflation in general refers to an increase in the price level of goods or services in an economy. 

Malaysia's inflation rate stood at 4% as of November 2022, with Economy Minister Rafizi Ramli saying efforts should be made to prevent it from rising in the near future. 

Bank Negara lowered the OPR rate in January 2020, to help borrowers in the wake of the Covid-19 pandemic. 

The OPR rate hit its lowest level of 1.75% in July of that year, although it was subsequently raised several times, on the grounds of controlling inflation and the ringgit value. 

It was last raised in November 2022, bringing it to 2.75%. 

Bank Negara is expected to increase the OPR twice in the year ahead. 

On Jan 4, Prime Minister Anwar Ibrahim said Bank Negara had full authority to determine the OPR rate, despite his previous criticism of former finance minister Tengku Zafrul Aziz during the earlier OPR hikes. 

Zahid, the vice-chairman of the Movement for Monetary Justice, said the idea of raising the OPR rate to curb inflation would cause companies to stop borrowing and to lay off their workers. 

He said people would also cut down on their spending, leading to a drop in the price of goods. 

"Is that not like moving the house around to change the lightbulb, or moving the dog to wag its tail?" he added. 

Economist Ahmed Razman Abdul Latiff meanwhile said that Malaysia's inflation rate was influenced by the bulk subsidies given by the government. 

Razman, of the Putra Business School, said inflation could be reduced by toning down reliance on imported goods and empowering local goods instead. 

"The inflation rate can be reduced and the ringgit will be strong," he said.

He also suggested curbing inflation by asking banks to change their loan rates. 

Banks currently lend very little to the real economy, with most given towards loans and the private sector.

"Reverse the ratio to 65% loans to the real sector and 35% loans to the personal sector," he said. 

"Don't just tweak interest rates to hope, rightly or wrongly, for an elongated chain of reaction to deliver the hoped-for results."