PETALING JAYA: Malaysians have been cautioned against pinning their hopes entirely on the increase in interest rates for a quick economic recovery.
Center for Market Education CEO Carmelo Ferlito explained that raising interest rates is akin to taking money out of the system and, by extension, reducing consumer spending.
“This will lead to a contraction in the economy, which means the economy will suffer,” he told FMT Business.
“But this is the price to pay to cool down the economy.”
At its monetary policy committee meeting yesterday, Bank Negara Malaysia (BNM) decided to raise the overnight policy rate (OPR) by another 25 basis points (bps), from 2% to 2.25%.
This is the second rate increase this year. In May, the central bank raised the OPR by a similar quantum to 2%. It had been languishing at a record low of 1.75% since a 25bps reduction in July 2020.
BNM cited the reopening of the global economy and the improvement in labour market conditions among the reasons for its decision to raise the OPR.
Ferlito said raising interest rates would not be enough to rein in inflation unless it is accompanied by cuts in government spending.
He said hikes in interest rates could also discourage investments. “However, if we look at the different components of Malaysia’s GDP, we can see that investments are already flat,” he said.
On the other hand, he said, the impact of a rise in the OPR on investment is less of a certainty.
“It depends on how investors perceive the move and that, in turn, will also affect the ringgit,” he said.
“If investors interpret it positively, the ringgit will strengthen and it will not benefit exporters. However, if they express concerns, the currency suffers and exporters may benefit, albeit temporarily.”
Reflecting his views, Rakuten Trade vice-president Thong Pak Leng said the hike in interest rates would have a negative impact on the overall market.
An hour after BNM announced the rate hike yesterday, the FTSE Bursa Malaysia KLCI (FBM KLCI) lost 17 points from the opening bell, underscoring Thong’s assessment of its impact on investor sentiments.
The benchmark index closed the day at 1,420.85 points, down 19.96 points from the previous day’s close.
Economists also agree that the rise in the OPR would have a dampening effect on the property sector.
Sunway University professor of economics Yeah Kim Leng pointed out that those with home loans would be affected, while Socio Economic Research Centre Malaysia executive director Lee Heng Guie said it would “leave a dent” in the property market.
“While savers will gain, the borrowers will face harder times,” Lee told FMT Business. “This would lead to a higher rate of defaults on loans.”
Yeah noted that in addition to a rising cost of living and inflation, borrowers will have to fork out more money to service their loans.
However, it is not all bad news. For instance, the banking sector will be the early winners.
Bank Islam Malaysia chief economist Afzanizam Abdul Rashid told FMT Business the lag time between the adjustments in the lending and deposit rates would give the financial services sector an immediate gain.
He said financial institutions with higher exposure to variable rates within their portfolio would have the most to gain.