The Overnight Policy Rate in Malaysia and How Does It Affect You

Bank Negara Malaysia (BNM) announced on 7 September 2023 that the Overnight Policy Rate (OPR) will maintain at 3.00%. 

So, what does this mean and, most importantly, how does it affect you?

What is Overnight Policy Rate (OPR)?

But first, let’s get back to basics by getting to know OPR – an essential part of Malaysia's monetary policy. OPR influences various financial measures such as deposit rates, lending rates, interest rates and more.

The OPR is set by Bank Negara Malaysia's (BNM) Monetary Policy Committee* to determine the interest rate charged between banks.

You might be wondering...why is this important?

Well, it’s a common practice for banks to borrow and lend money to each other to maintain their Statutory Reserve Requirement (SRR)**. The OPR enables banks to meet unprecedented liabilities by ensuring a consistent and stable supply of cash.

Above all, the OPR serves as a fundamental framework for ensuring a stable economy and a well-functioning banking system. 

So, how often is the OPR revised? BNM's Monetary Policy Committee convenes regularly to review the country's monetary policies including the OPR. Most often, slower economic growth results in lower interest rates to encourage spending and investment. In contrast, the OPR will be amended upwards when the economy has faster economic growth to increase borrowing costs and reduce spending. By doing this, the risks of an overheated economy, and subsequently inflation, are subverted.

What is Base Rate (BR)?

Now that you understand what OPR is, let's explore the BR or Base Rate. Effective January 2015 to July 2022, the BR serves as an interest rate referred by banks to determine their interest rates.

It is calculated against a reference rate (i.e. banks' cost of funds and Statutory Reserve Requirement), along with a spread (i.e. borrowers' credit risk, operating costs, liquidity premium and profit margin). Banks in Malaysia decide their interest rates according to a formula set by the central bank, with the BNM rate as a benchmark.

While BNM provides the formula, each bank’s interest rates are determined internally. In addition, every bank has its own set of numbers and calculation methods. The BNM provides no intervention, and banks can deliver better deals and more attractive packages to suit their client's needs. 

What is Standardised Base Rate (SBR)?

Following the revised Reference Rate Framework***, BNM announced the SBR or Standardise Base Rate, to replace the BR system. Effective August 2022, the SBR serves as a framework or a standard reference rate for pricing retail floating-rate loans, including personal and housing loans.

Attached solely to the OPR, the SBR offers a single rate of reference for all Malaysian banks. Since the existing repayment instalment is in correspondence with the change in the OPR, it helps you to understand the changes in your lending rates better.

How Does the Change from BR to SBR Affect Your Finances?

For Existing Borrowers

• For loans applied and approved before 1 August 2022, the transformation from BR to SBR does not influence your lending rates. Instead, they would follow the BR system until repaid in full****. 

For New Borrowers

• For loans applied and approved for borrowers after the said date, your interest rates will move together with the OPR. 

Compared to the BR, the SBR delivers heightened transparency. Simplifying the tedious task of assessing the differences between BRs across banks, the SBR system helps you to make better-informed decisions.

Overall, fluctuations in the OPR will inevitably affect your finances, and it’s tremendously important to keep track of the changes or adjustments of the OPR in Malaysia. Check out our Life Goals section for more tips and guides on finance, investment, savings, travel and more!

This article is for informational purposes only and CIMB does not make any representation and warranty as to the accuracy, completeness and fairness of any information contained in this article. As this article is general in nature, it is not intended to address the circumstances of any particular individual or entity. You are advised to consult a financial advisor or investment professional before making any decisions based on the information contained in this article. CIMB assumes no liability for any consequences arising from your reliance on the information presented here.

Source:

*https://www.bnm.gov.my/monetary-stability

**https://www.bnm.gov.my/statutory-reserve-requirement-srr-

***https://www.malaymail.com/news/money/2021/08/11/bank-negara-standard-base-rate-to-replace-base-rate-from-next-august/1996917

****https://www.bnm.gov.my/documents/20124/938039/Consumer+Guide_RRF_EN.pdf?s=1