OPR Hike: How Will The OPR Increase Affect You?

OPR increase

What is OPR?

The Overnight Policy Rate (OPR) is interest rate at which a bank lends to another bank, which is set by Bank Negara Malaysia (BNM). This rate has an effect on the country’s employment, economic growth and inflation. It is an indicator of the health of a country’s overall economy and banking system.

For example,  the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to provide support to the economy during the pandemic.

In the last 15 years, the OPR rate has risen as high as 3.5% in 2006 and stayed within the range of 3.0% to 3.25% in the last 10 years. In 2020, the rate plunged drastically to 1.75%.

Why is there a hike?

Historically, BNM’s Monetary Policy Committee (MPC) would not decrease or increase the interest rate by a huge margin in one go as it would hurt the market.

The most recent decreases during the lockdown due to the pandemic were delivered in 4 consecutive reduction of 25bps (basis points) each time, totalling 100bps drop in the rate.

Subsequently, as you can see below, the OPR has been increased gradually since the all time low reached back in 2020.

DateChange in OPR (%)New OPR Level (%)
3 May 2023+0.253.00
3 Nov 2022+0.252.75
6 Jul 2022+0.252.50
8 Sep 2022+0.252.25
11 May 2022+0.252.00
20 Jan 2020 to 3 Mar 202201.75

How will it affect you?

So, will you be paying more interest for your loans?

Any changes will impact floating rate loans which are common for mortgages. An increase in OPR will likely have a knock-on effect on the rates charged by banks for home loans for the simple reason that banks adjust their lending rates by a similar quantum when OPR changes.

Historically, banks will raise about 20bps to 30 bps for a 25 bps hike in OPR.

For example, if the banks decide to pass on this hike to the consumers, the Base Lending Rate (BLR) will most likely increase by 25bps (0.25%). If a bank had previously set its BLR at 5.50%, this will increase to 5.75%.

For example, if your mortgage loan is pegged to the BLR, and the OPR hike will lead to a higher mortgage interest rate, which means that you’ll be paying higher monthly repayments. Here’s an example of how this works:

Loan amount
Loan tenure
30 years
BR: 2.80%
BR: 2.80% + 0.25%
= 3.05%
Home loan interest rate
(2.80% + 0.8%)
(3.05% + 0.8%)
Monthly repayment
Total interest paid over 30 years

Source: calculator.com.my

Based on the example above, the 25 bps hike will result in an additional RM25,492.40 paid in interest over a 30-year loan tenure.

Borrowers won’t be impacted severely by this immediately as can be seen in this example, it would raise their monthly repayments by about RM71.04. However, over the entire loan period, it comes up to a substantial amount.

How will it affect the country?

According to BNM, headline inflation has continued to moderate, but core inflation has persisted above historical averages.

The growth outlook also remains subject to downside risks. The key triggers BNM highlighted include escalation of geopolitical tensions, higher-than-anticipated inflation outturns, and any sharp tightening in financial market conditions including from further stress in the banking sector.

On the domestic front, exports are expected to moderate. Growth in 2023 is expected to be driven by domestic demand.

Going forward, the forecast for household spending remains resilient, underpinned by better labour market conditions as unemployment continues to decline to pre-pandemic levels.

With the adoption of the Standardised Base Rate (SBR) effective August 1, 2022, find out how the new Base Rate will affect you. 

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