LETTER | The Covid-19 pandemic has had significant effects on countries all around the world, including Malaysia.
With a growth rate of -5.53 percent in 2021, Malaysia entered a period of economic recession. Many firms failed to survive and were forced to fold, leaving a large number of individuals unemployed.
In response, Bank Negara Malaysia (BNM) lowered the overnight policy rate (OPR) to 1.75 percent in an effort to soften the blow and pull the economy out of recession.
The economy then rebounded by 8.7 percent in 2022, prompting BNM to raise the OPR to 2.75 percent. This is a normal phase of the economic cycle, and BNM has taken the appropriate steps to stabilise the economy.
During a recession with negative economic growth, the OPR is often lowered by the central bank. This reduces the cost of borrowing money for commercial banks, allowing them to lend to cash-strapped firms and households during the crisis.
This is intended to stimulate economic growth and mitigate the negative consequences.
However, even if decreasing the OPR can stimulate the economy, it is not a viable long-term option. To maintain economic stability while managing prices and preventing inflation, the Federal Reserve must alter the OPR accordingly.
This is due to the possibility of inflation if the OPR remains low for an extended period of time.
With low interest rates, businesses and households continue to borrow and spend more money, which can lead to inflation. This can have long-term negative effects on the economy.
When the economy recovers, it is essential for the central bank to raise the OPR. Thus, BNM’s decision to raise the OPR once the economy has recovered from the recession caused by the Covid-19 outbreak is the right decision.
This is because normalising the rate is necessary after boosting economic growth. If BNM increases the OPR during a recession when businesses and households have less money, then this action should come under fire as it can worsen the economy.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.