OPR Hike: How Will The OPR Increase of 0.25% Affect You?

interest rates

Bank Negara Malaysia (BNM) has raised the overnight policy rate (OPR) by 25 basis points to 3.25% on July 10, 2014 – its first hike since May 2011.

This was decided at the Monetary Policy Committee (MPC) meeting today.

“The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively,” BNM stated in its release.

What is OPR?

The OPR is interest rate at which a bank lends to another bank, which is set by 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.

Why is there a hike?

Economists opined that the central bank increased the rate to tackle inflation based on the scenario that growth is too strong and on fears that there could be asset imbalances in the system.

Latest economic indicators suggested continued strength in exports and private sector activity in Malaysia. It also expected Malaysia’s overall economic growth momentum to be sustained.

The increased OPR is aimed to normalise the current monetary conditions and to mitigate the risk of broader economic and financial imbalances that could jeopardise the country’s economic growth.

Manokaran Mottain, chief economist of Alliance Bank Malaysia, said to The Star that the hike in the OPR was a “pre-emptive measure to prevent further disproportionate risk taking as well as reducing asset price misalignments”.

The increment by 0.25% is well within expectation, opined Mottain.

According to AllianceDBS, the 0.25% hike should be manageable and not affect borrowers’ ability to service higher interest costs, but a larger hike could create risks of a higher non-performing loan (NPL) and provisions.

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. While the effect of the new lending rate framework is still unknown, 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%) from 6.6% to 6.85%.

Here’s an example of how it would affect you:


Based on the example above, the 25 bps hike will result in RM15,896 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 only about RM44. However, over the loan period, it comes up to a substantial amount.

How will it affect the country?

In anticipation of the OPR hike on July 9, 2014, Malaysia Ringgit was reported to have jumped to its highest in 36 weeks, since November 2013, hovering at 3.17 to the US dollar. At the close on Thursday, the ringgit was trading at RM3.182.

Raising the OPR has given foreign investors more confidence to pump in their money in the form of investments in Malaysia.

This move will benefit banks on short-term basis, especially those banks with current account/savings account (CASA) ratio. With the exception of AmBank and Affin (with a larger share of fixed rate loans), most banks should benefit from the raise.

According to the latest issue of MIDF Equity Beat, the 25 bps hike will be mildly positive for banks as the quantum of expected rate hike is smaller than that in the previous OPR hikes (the last one was 75 bps) and earnings growth for banks for this year at about 6% is much muted as compared to the past.

Furthermore, the hike will encourage further competition for deposits and this will exert pressure of banks cost of funds and net interest margin (NIM).

“In the meantime, the rise in OPR will likely improve Malaysia’s attractiveness amongst foreign investors, leading to stronger capital inflows, lower bond yields and an appreciating ringgit,” said Mottain from Alliance.

Though most experts do not see the recently announced OPR hike to be the start of a monetary tightening process, the new rate will inevitably pinch consumers’ pockets even further. However, the OPR will most likely remain unchanged for the rest of 2014.


Need more information on home loan regulations? Understand what Base Lending Rate (BLR) is and how it affects your home loan.

With the anticipated change in the lending rate framework, find out how the new Base Rate will affect you. 

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