Ringgit records all-time low

As economic activities have been spurring after years of stall, Bank Negara Malaysia (BNM) has begun to hike the OVERNIGHT POLICY RATE (OPR). In 2022, BNM raised the OPR by 100 basis points (bps) from 1.75% to 2.75% (at the time this article was written). The OPR has been the talk of the nation for months. This begs the question,

RINGGIT RECORDS ALLTIME LOW AGAINST GREENBACK: WAS INCREASINGTHEOPR THERIGHTCALL?

By: Anieq Luqman Shah

What is OPR and why does it matter so much?

At the end of every business day, banks are required to meet a minimum amount of reserves. If a bank does not meet the requirement, it will have to borrow cash from another bank which has a surplus of reserves. As you know, when we borrow money from banks, we are obligated to pay them interest. The same goes to banks wherein the OPR is the interest rate. When banks have to pay more, they pass the extra costs to us, their customers. This is done by increasing interest rates on personal loans and mortgages. Additionally, businesses that intend to expand their empire will reconsider doing so. The outcome is a ripple effect that will take place resulting in an economic slowdown. As such, the OPR acts as an instrument to tame inflation. As the OPR is increased, cost of borrowing increases causing purchasing power to decrease. When consumers have less cash in hand, demand will fall and firms become wary to increase prices. At the end of the day, inflation will stabilize.

As increasing the OPR slows down economic activity, investors would want to draw their capital out of the economy and place it elsewhere. Therefore, the Malaysian currency would depreciate. As of now, the value of Ringgit against US Dollars has surpassed the 4.70 mark. So, did BNM scare investors away?... No. Here is why. As the supply chain has been disrupted due to the pandemic and further impacted by the geopolitical crisis in Ukraine, inflation has become a global phenomenon. When we face times of uncertainties, investors seek shelter by investing in the global reserve currency as it is considered a safe haven. Furthermore, the US Federal Reserve decided to use an aggressive approach to tame inflation. This year, the Fed interest rate has spiked by 350 bps from 0.25% to 3.75%. As the US interest rate is higher than ours, it is admissible to invest in the American economy rather than the local economy where it can give higher returns (OPR does not only affect loans but also investments). On top of that, Malaysia is expected to hold our 15th General Election soon. This removes political stability in our country and results in loss of confidence among investors. Nevertheless, a weak ringgit can still be put to good use for exporters and tourists as these industries would find its demand boosted.

In conclusion, was increasing the OPR the right move? I believe that the strategy of increasing the OPR gradually is convincing and the right call made by the Monetary Policy Committee. Keeping the OPR low could do more damage as it would just widen the gap between the Fed rates and ours. Eventually, this will put the ringgit in a worse position. Despite the terrifying volatility of the ringgit, the welfare of citizens are still at ease and there are no indicators that we are heading into a recession. Yet, a higher OPR has reduced the nation’s burden on the matter of inflation in the economy. Although not by much, it is the least that the central bank can do.