Guan Eng knocks 'surprise' OPR hike, says it affects business confidence

Former finance minister Lim Guan Eng has expressed surprise and disappointment over the recent increase in the overnight policy rate (OPR) by 25 basis points to 3 percent.

The DAP chairperson questioned the rationale for the increase and said that it would not be good for business confidence.

“One of the key rationales given by those defending Bank Negara Malaysia’s (BNM) surprise increase collapsed when the ringgit depreciated against the US dollar.

“The OPR hike of 0.25 percent was supposed to help boost the strength of the ringgit against the US dollar,” Lim said in a statement today.

However, the Bagan MP pointed out that in less than 10 days, the ringgit has depreciated from RM4.45 to the US dollar on the day of the OPR hike on May 3, to RM4.47 today.

“Clearly the value of the ringgit is not determined by sound economic fundamentals, solid economic performance, growth rates or OPR set by BNM but more a function of interest rate expectations of the US Federal Reserve.

“This is demonstrated during BNM’s two interest rate pauses this year, which did not jeopardise the value of the ringgit but instead appreciated to RM4.24 to the US dollar on Jan 28,” he said.

Lim said this indicated that the ringgit could still strengthen to the January levels when interest rate hikes by the Federal Reserve hits a pause, thereby allowing the performance of key fundamentals of the Malaysian economy to come into play.

OPR and inflation

He added that the idea of increasing the OPR to contain inflation was also flawed.

“The other acceptable rationale for an OPR hike is to contain inflation.

“However, inflation fell from 3.7 percent in February to 3.4 percent in March, negating the need to raise the OPR when inflation is being reined in.

“The 3.4 percent inflation rate for March is a 34-month low, making the OPR hike so unexpected.”

This sentiment, Lim said, is reflected by most economists, citing a Bloomberg poll of 19 economists which found that 16 expected the OPR to remain unchanged with only three predicting an OPR hike.

“A poll of 25 economists by Reuters found that 21 expected the OPR to be maintained with only four predicting an OPR hike,” he added.

Borrowers will feel hike

BNM governor Nor Shamsiah Mohd Yunus today denied that the increase in the OPR has led to a rise in bankruptcies.

She said there are no figures to support such an allegation, adding that, on aggregate, households have continued to hold financial assets in excess of debt which enables them to manage higher borrowing costs.

“We acknowledge there are pockets of segments and sectors that need help due to their circumstances, and help remains available for those in need.

"With all these conditions, it is timely, necessary and warranted that monetary policy is recalibrated to make sure that we continue to be on a sustainable growth path," she added.

Lim, however, opined that the hike was still a “nasty surprise”.

“This nasty surprise of an OPR hike will be felt most by bank borrowers, especially individuals with a vehicle, home, and credit cards as well as small and medium enterprises bearing a heavier financial burden.

“Apart from borrowers, the economy may also suffer with a higher interest rate affecting economic growth already affected by global uncertainties of a US-led global recession.

“According to S&P Global Market Intelligence, the seasonally adjusted Malaysia Manufacturing Purchasing Managers’ Index (PMI) remained below the 50-point mark separating monthly expansion and contraction, with the index unchanged at 48.8 in April,” he said.

Lim viewed it as a warning signal of a subdued Malaysian manufacturing sector at the start of this year’s second quarter amid a challenging economic environment.

“The surprise OPR hike definitely does not help to boost business confidence,” he added.

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