You may have heard that Bank Negara Malaysia (BNM) has cut the Overnight Policy Rate (OPR) to the lowest level ever, of 1.75%. But are you wondering why that matters to you?
The short answer is that a lower OPR leads to lower interest rates, which means you’ll pay less interest for flexible interest rate loans you have. But, you’ll also be earning less from your savings and fixed deposits.
Read on to find out how this works!
What is the OPR, anyway?
The OPR is the interest rate a bank pays another bank for borrowing money from them. A simple explanation for why banks borrow money from each other is that sometimes they do not have enough cash, because they lend money to customers like you.
Banks also use the OPR to set the Base Rate (BR), Base Financing Rate (BFR) and Base Lending Rate (BLR) they use to decide how much interest to charge you for your loan, such as a home loan, or pay you for saving and investing.
Why is the OPR important?
BNM uses the OPR to guide the economy to speed up or slow down. Right now, because of the COVID-19 crisis and other events in the global economy, Malaysia’s economy is slowing down. A slower economy could cause companies to cut back on hiring or reduce salaries.
To avoid or minimise the impact of a recession, we need the economy to speed up. By cutting the OPR, it will lead banks to lower their BR/BFR/BLR. In the end, the lower OPR results in lower interest rates.
The lower interest rates make loan repayments cheaper. This could encourage you to take a loan to spend on things that will move the economy, like buying or renovating a house, or buying a car. If you already have a flexible rate loan, you could use the savings you get from a lower loan repayment to spend a little more, which is also good for the economy now.
Apart from loans and spending, the lower interest rates also encourage you to invest in items that will give you a higher return than bank savings, such as stocks or property.
For businesses, cheaper borrowing means they can get a loan to maintain or grow their business. It also gives them more reason to invest instead of leaving their cash in the bank. This also helps protect the economy from a recession, because staying in business lets companies avoid retrenchments or pay cuts.
So, you get to pay lower interest on your loans!
With the lower OPR, all banks have cut their rates for new and existing loans.
The lower rates mean that you will be charged less interest for any flexible rate loans you might have, like your mortgage. But, it won’t have any effect if you have a fixed rate loan, like a car loan. So, check with your bank if the change in interest rate affects any of your loans. You can also use our calculators to see how your repayments might change.
You will make less from your savings and fixed deposits
Don’t forget, interest rates are also used to reward you for saving. By lowering interest rates, BNM is also encouraging you to take some of your money out from savings and fixed deposits. This is so you will spend more money instead, and also keep the economy moving.
Banks which have lowered their BR/BFR/BLR have also cut their rates for savings accounts and fixed deposits. Again, check with your bank to see how much you’ll be making from your savings and fixed deposits with the lower rates.
Even though the level of interest rates now are aimed at putting more money in everyone’s pockets to keep the economy alive, it doesn’t mean you should go wild applying for loans, spend all your savings or take out your investments. Stay sensible with your money and remember to always have enough emergency funds set aside, especially now that we’re in tough times.
For more ideas on how to manage your money, read our Guide on Planning and Budgeting.