KUALA LUMPUR, May 28 — Bank Negara Malaysia’s (BNM) recent overnight policy rate (OPR) hike — to bring it back to pre-Covid-19 pandemic levels — was not prematurely done, but was instead a carefully considered move to pre-emptively bring down inflation in Malaysia instead of waiting until it is too late to take action, the BNM governor said today.

BNM governor Tan Sri Nor Shamsiah Mohd Yunus said the central bank’s May 3 increase by 25 basis points of the OPR to 3.00 per cent was also meant to help ensure Malaysia has a sustainable and steady economic growth, as economic growth would be affected if inflation goes out of control.

In a commentary today, Nor Shamsiah responded to criticism — which had claimed that there was no reason to hike the OPR as inflation in Malaysia has been moderating or decreasing.

But Nor Shamsiah stressed the importance of BNM’s recent OPR hike as a precautionary move, cautioning that Malaysia still needs to look out and keep watch to ensure inflation does not go out of control.

She noted that inflation in Malaysia has been lower recently with headline inflation at 3.6 per cent in 2023’s first quarter compared to 3.9 per cent in 2022’s fourth quarter largely due to lower RON97 petrol prices, but said core inflation — which is a proxy of demand-drive inflation — is still high with an average 3.9 per cent in 2023’s first quarter compared to the long-term average of 2.1 per cent.

She said prices are expected to remain higher compared to what Malaysians are used to, as economic recovery meant that demand remains strong.

Amid such a situation, Nor Shamsiah explained this is why BNM decided to increase the OPR before inflation could become entrenched, as failure to act now could instead lead to BNM being forced to increase the OPR higher and faster just to lower inflation levels in Malaysia.

“While some have claimed that our policy normalisation is “premature”, we aim to be pre-emptive as this is less costly to the economy than waiting until it is too late to act.

“It will take much bigger and faster OPR increases to bring inflation down once it has taken root — as we can see in other countries,” she said in the lengthy commentary published by news portal Malaysiakini.

Following the OPR hike, banks in Malaysia have also pushed up the interest rates charged on borrowers’ loans, while also giving higher interest rates for fixed deposits and savings to its customers.

If the OPR rate is kept “too low for too long”, this would make it cheaper to borrow and could result in too much borrowing and spending, which could result in prices of goods or inflation being pushed up.

Nor Shamsiah said a “too low for too long” interest rate environment carries the danger of potentially damaging the economy, citing the “sobering reminder” of the Global Financial Crisis which happened in 2007-2008 and was rooted in the US housing market.

Before BNM’s May 3 OPR hike, she said financial market observers had already widely anticipated that BNM would be increasing the OPR — in line with the central bank’s plans for a “gradual and measured” normalising or bringing back OPR rates to pre-pandemic levels, but with the observers having different views on when BNM would actually carry out the OPR hike.

“Many expected us to do it in the second half of the year but some noted that it was timely to do so in May to prevent inflation from becoming entrenched given the resilient economic growth. We are not out of the woods yet and need to be on guard,” she said.

As for borrowers who face difficulties in repaying their loans after the OPR rate hikes, Nor Shamsiah said they can either reach out to their banks or to the Credit Counselling and Debt Management Agency (AKPK) for help to work out an alternative repayment arrangement that works for them.

Nor Shamsiah again stressed the OPR rate hike’s necessity to control inflation in Malaysia, saying that failure to manage “excessive price pressures” as seen in some other countries would result in everyone being affected.

“The B40 and vulnerable groups are the ones who will be the most affected if we let inflation get out of hand, and we will not be able to preserve sustainable growth over the longer term. We cannot and must not let that happen,” she said.

Nor Shamsiah’s commentary comes just days after DAP national chairman Lim Guan Eng’s criticism of the BNM’s May 3 OPR rate hike as purportedly being “premature”.

As for criticism that the OPR has allegedly not helped the Malaysian ringgit, Nor Shamsiah said it is the market that decides the ringgit’s value against other currencies and that the US dollar’s movement currently continues to be the major factor affecting the value of currencies including the ringgit.

She said it is reasonable to expect the ringgit’s value to fluctuate from time to time under a flexible exchange rate regime, and said such adjustments are necessary to allow Malaysia’s economy to adjust to global economic and financial shocks.

“In 2022, at one point, the ringgit swung as much as 11.5 per cent between end-March to early November, before appreciating towards the year’s end. Yet the real economy grew by 8.7 per cent during the year. This is how the exchange rate and the deeper financial market buffer us from adverse external shocks,” she said.

“The policy priority now is to sustain economic growth in an environment of price stability and to further strengthen domestic economic fundamentals through structural reforms,” she said, adding that BNM has continuously called for structural reforms.

Instead of short-term measures or monetary policy decisions (including OPR decisions), structural reforms will provide more lasting support for the ringgit, she said.

Among other things, she highlighted the prudent and forward-looking approach to OPR rates in Malaysia, with BNM being one of the first central banks in the region to start normalising OPR rates last year, which resulted in Malaysia’s inflation rate being lower than the regional average.

While seeking to control inflation, BNM had aimed at ensuring Malaysia’s economy continues to grow steadily, instead of engineering a slowdown in economic growth or even a recession to bring down inflation, she said.

Nor Shamsiah said BNM had gradually increased its OPR since last year — with smaller and slower hikes than regionally — and had even paused OPR rates hike twice to assess the cumulative impact of the OPR hikes on Malaysia’s economy, as it takes time for the impact to show.

Before the May 3 decision to hike the OPR was made, Nor Shamsiah said BNM’s Monetary Policy Committee (MPC) had looked at all economic indicators, which showed Malaysia’s economic growth remains strong, with continued strength in employment and domestic demand (such as in the form of consumers’ spending, car sales, tourist arrivals) and resilient growth prospects from businesses.

While Guan Eng had cited the latest Purchasing Managers’ Index (PMI) figures when questioning the May 3 OPR hike, Nor Shamsiah said individual indicators — such as the PMI — on their own cannot be the sole basis in deciding on the appropriate policy, and that the MPC cannot consider data in isolation but has to consider all relevant global and domestic information before making monetary policy decisions (which includes OPR rate levels).

To find out more about BNM’s explanation of monetary policy and the effects of changes in OPR levels, read its frequently asked questions (FAQ) section here:

On Twitter, BNM has also provided further information, such as answers to nine common misconceptions about its recent OPR hike: