KUALA LUMPUR, Mar 8 — The decision by Bank Negara Malaysia to maintain the Overnight Policy Rate (OPR) at 1.75 per cent last week was both appropriate and accommodating in supporting economic recovery efforts amid the debilitating global pandemic.

Continuing with the low-interest rate regime would also help large borrowing companies to mitigate any sudden spike in instalments, this provides some form of stability to ensure that they can keep growing their business.

The low-interest rate is also critical to further stimulate economic activity by attracting foreign investors who might otherwise be holding back on investments due to the business downturn.

Telling factors influencing the central bank’s decision was the successful procurement and start of the Covid-19 vaccination programme in Malaysia last month and also the absence of any new risk forecast for the economy.

There seems to be an overall consensus that the OPR — now at an all-time low of 1.75 per cent — decided at the last three Monetary Policy Committee (MPC) meetings since September 10 last year, will be maintained for the rest of 2021.

However, one might ask why didn’t the central bank reduce the OPR further, like Indonesia, as loans would be considerably cheaper. This is because BNM cannot just rely on the OPR. 

The government’s strategy is to use monetary policy tools, such as the OPR, and fiscal measures, such as public expenditure, to continuously support the economy amid challenging business conditions.

Monetary tools and the fiscal policy must go hand in hand taking into account government measures to pump more funds into the system and help the people during the more than one-year of stifling pandemic.

These measures include incentives to attract foreign investment, tax rebates and numerous programmes to the tune of billions of ringgit launched by the government over the past year.

Notably, the fiscal measures include four stimulus packages worth RM305 billion that have been disbursed since Malaysia was affected by the pandemic.

They are the Prihatin Rakyat Economic Stimulus Package (Prihatin), PrihatinPKS+, the National Economic Recovery Plan (Penjana), and KitaPrihatin. The largest ever RM322.5 billion budget unveiled for 2021 is a continuity from these stimulus packages. 

Another significant fiscal measure is the Home Ownership Campaign (HOC) offering incentives such as waiver of stamp duties and developer discounts and freebies to encourage buyers to take up new housing units and properties.

Incentives to spur the property market will have an extensive multiplier effect, given the thousands of small and medium scale enterprises (SMEs) and companies involved in the sector, especially in the supply of building materials.

One of the many positive steps taken by the government was enabling first-time home buyers to enjoy full stamp duty exemption until 2025 to boost homeownership.

Similarly, extending the vehicle sales tax exemption until June 30, 2021, will have a positive effect on the automotive sector which also has numerous ancillary and supporting industries.

This incentive will lead to a huge multiplier effect that would additionally stimulate the economy.

These incentives and also the easing of last week’s movement control order are expected to boost more economic sectors and position the economy to expand between 6.5 and 7.5 per cent in 2021.

This uptake in economic growth will be supported by improvements in global demand, public sector expenditure and policy measures and incentives.

Another plus point for Malaysia is the improvement in global oil and commodity prices, improvements in the balance of payments position and trade figures.

Malaysia’s trade position is commendable as the country’s trade surplus widened by 26.9 per cent to RM184.8 billion in 2020, the largest trade surplus recorded so far, while total trade amounted to RM1.8 trillion.

Oil prices have risen to their highest in over a year, with Brent nudging past US$60 (RM1=US$4.09) a barrel, boosted by supply cuts among key producers.

This has lifted sentiment in Malaysia as a US$1 increase in oil prices means an additional RM300 million in revenue.

Another consideration why BNM did not lower the OPR further could have been over some inflationary pressure concerns in view of the rising global oil prices and commodity prices, although it is not an immediate concern.

However, had the OPR been lowered, petroleum product prices and consumer durables might have come down leading to a higher uptake and, consequently, the demand exceeding supply.

Given that petroleum prices have a wide impact on economic sectors, it could lead to rising costs, hence, raising inflationary concerns in areas such as the transport sector which may eventually raise ticket fares.

Still, a major reason why BNM would have opted to maintain the OPR and not reduce it further, for instance to 0 per cent, was to give it room to use more ‘bullets’ by way of adjusting the OPR.

This is in view that Malaysia, as an export-oriented nation, is also largely dependent on global trade.

For any reason the global economy deteriorates or turns unpredictable, it could trigger an adverse reaction locally.

It must also be remembered that the OPR is a double-edged sword. Lowering it might be good for consumers and borrowers but bad for depositors and retirees who will see lower rates of returns and a disincentive to save.

In the overall scheme of things, it is good to note that the central bank is working closely with government policymakers to ensure a coordinated and practical approach to reinforce Malaysia’s economy.

It is hoped that such a strategy would enable Malaysia to pull through from what is surely an unprecedented challenge brought on by the global pandemic. — Bernama