Monetary Policy

BNM comfortable with current monetary

policy of 3 pct OPR

            I had read about a news article about the monetary policy in Malaysia. In that article, it stated that Bank Negara Malaysia (BNM) which is the central bank of Malaysia had decided to remain the overnight policy rate (OPR) at 3%. It is says that the monetary policy in Malaysia is accommodative and the research arm of MIDF Amanah Investment Bank Berhad said that the BNM is comfortable in term of addressing the inflation and liquidity while boosting growth. Besides, they also said that if the economic condition had become worsen, any reduction on the OPR can be carrying out. Furthermore, the research house also believes that there’s a high probability of increase in the OPR from 3% to 3.25%.

            Before I get into the main topic, I believed that some of the people who don’t understand what are overnight policy rate (OPR) as I had stated on the summary of the article. So, OPR is set by the Bank Negara Malaysia (BNM) which is imposed by the fund lending between two depository institutions overnight which balance with the central bank. According to the Principle of economics, interest rate refers to the rates in loans that the commercial banks provide to the general public. Well, there several factors which will affect the interest rate. Those factors comprises of the type of the monetary policy, open-market operation, and the reserve requirements. Monetary policy is defined as the central bank using some of the instrument in order to influence the economy by varying the interest rate and money supply. There’s two types of monetary policy include contractionary which is tight or restrictive monetary policy and expansionary which cheap or easy policy. The open-market operation involved in the purchase and sales of the government security in financial market so as to influence the size of the bank deposit. The reserve requirement influences the amount of money that the banking system can create with each amount of money of reserves.

           

            According to the summary of the news article, you guys would be wonder why the BNM decided to maintain the interest rate? Of course there will be some effect on the money supply through the changing on the interest rate that is affected by the causes above. Well with the assumption of constant GDP and price level which will cause the money demand curve to remain constant, if the government decided to undertake an expansionary monetary policy this will somehow increase the money supply. Therefore this will cause the money supply curve shifts to the right which will result in the interest rate to drop. In the other way, if the government undertake contractionary monetary policy it will cause the supply to decrease which results in the shifting of the money supply curve to the left that will cause the interest rate to increase.

For the open-market operation case, if the government buy more bonds,  the money supply will increase which the money supply curve will shifts to the right that will cause the interest rate to decrease whereas if the government sell more bonds this will cause the money supply which cause the money supply curve to shift to the left. Therefore, this will result in the interest rate to increase.

           Finally, in the reserve requirements, if the reserve ratio is lower, the money supply will increase. Therefore, the money supply curve will shift to the right which will cause the interest rate to fall. However, if the reserve ratio is higher, the money supply will decrease that will cause the money supply curve to shift to the left. Therefore, this will cause the interest rate to rise. The only effect on the changing of the interest rate is the public’s demand on acquiring the loans. When the interest rate is higher, the public will have more burden on acquiring the loans, the public’s demand on acquiring loans is lower whereas as the interest rate decrease, the public’s demand on acquiring loan is higher because the decrease on the interest rate can provide advantage for the public to acquiring loans. 

            To wrap up, in my points of view, I agree that the central bank which is the BNM had decided to remain the interest rate. According to the economy today, our Malaysia economy’s is still on the safe track. The 3% interest rate is just nice for our Malaysia economy in which the fluctuation rate of the interest rate is low. If the interest rate is too low, the people’s purchasing power will be excessively high. This will tend to cause the price of the assets and the cost of living to increase dramatically. Therefore, this situation will lead to inflation. In other way, if the interest rate is too high, the people’s purchasing power is low. People would prefer to keep their money in the bank instead of buying goods which will provide a disadvantage for the firms or companies in selling out their goods in which they will have lesser customer that will cause them to gain less profit and as this situation goes on, they would have to fired some of the employees which will cause a high rate of unemployment. For the company’s case, the excessively high in interest rate will create a burden for the companies to borrow money from bank. Therefore, the company will have to postpone their expansion and entrepreneurial activities because it’s too expensive for them to hire more employees for the expansion and the entrepreneurial activities. This will somehow lead to recession which will severely affect the economy.

Reference list:

http://www.theborneopost.com/2012/11/10/bnm-comfortable-with-current-monetary-policy-of-3-pct-opr/

By Wilson Chion Zheng Hui