Today's paper (7th July 2010), finance specialists predict BNM will up OPR to another 0.25% by tomorrow's meeting and will keep it for the rest of the year due to uncertainty of the economy.
If it happened, OPR will be 2.75% by 8th July 2010, 3rd increase during last 4 months. What will happen thereafter?
1. BLR will up by same quantum of 0.25% to 6.30%
- most Malaysian whom has a house loan will be paying more interest than principal (assuming bank keep the installment amount)
2. Fixed deposit rate will be up but likely to be less than 0.25%, say 0.15% to 3.00%.
- small percentage of Malaysian population will be very happy as they depends on fixed income like FD to sustain their life-style (especially retiree)
So what? How to link "interest rate" to you?
Are you a lender or a borrower?
Lets learn a bit about interest rate from economic point of view.
- Interest rates control the flow of money in the economy.
- High interest rates curb inflation, but also slow down the economy.
- Low interest rates encourage spending and make it easier for business to borrow to invest.
- Interest rates also affect the value of Ringgit versus that of other country.
- All other things held constant, when real interest rate (inflation-adjusted) are higher (e.g. Malaysia's interest rate is higher than Singapore, Thailand, Taiwan, Japan, Hong Kong, USA, UK, Canada, European), then foreigners want to invest their fund here in Malaysia in order to earn a higher return. Therefore, demand for Ringgit will push up the value of the Ringgit.
- When Ringgit become more expensive, good for imported good (cheaper now) but bad for exporting business because our goods are more expensive. (Malaysia's economy is heavy on export).
- So, when interest rates are too high, Malaysia economy will slow down from two sides, internally domestic spending and external demand for our goods.
- So, as a conclusion, Malaysia's OPR or FD Rate are highly likely capped for the time being until..... who knows, can be a decade or more.
BNM = Bank Negara Malaysia
OPR = Overnight Policy Rate
BLR = Based Lending Rate
FD = Fixed Deposit