Monetary policy decisions affect many facets of a nation’s economy. As such, it is often the case that such decisions are closely watched and debated not just by financial markets, but also by the general public.
The lively conversations around the BNM Monetary Policy Committee’s (MPC) decision to raise the OPR by 25 basis points on 3 May exemplify this fact.
Deciding on the OPR isn’t something BNM takes lightly. There are many factors that the MPC considers. BNM's analysis is based on a broad range of forward-looking data and engagement with various industries and consumers.
So, would OPR hike affect our economic growth?
Below is the answer provided by BNM:
BNM’s mandate is to maintain price stability that is conducive to the sustainable growth of the Malaysian economy. In doing so, the Bank pursues a monetary policy that serves the interests of the country with this objective in mind.
This means not just considering the immediate impact of our action, but also taking a long-term view of our policy measures, including OPR decisions. All central banks work under the same premise.
The past and recent decisions on the OPR are based on this principle. At every meeting, the MPC walks the policy tightrope carefully – balancing between the risks to economic growth and inflation.
Meeting over the course of two to three days, we examine and discuss a range of indicators and macroeconomic models to assess the health of the economy and inflation.
We also review feedback and observations shared with us from households, businesses and market players, allowing us to get a better understanding of developments and economic conditions on the ground, across all segments of the economy, up and down our country.
It is important that the MPC be prudent and forward-looking. BNM was one of the first central banks in the region to have started normalising interest rates last year, and this can be seen by our inflation rate being lower than the regional average.
We also want growth to continue steadily, and not engineer a slowdown in growth or even a recession to bring down inflation. This is a spectre facing quite a few countries which we want to avoid.
In normalising the OPR, we made sure to do so in a way that works for our economy. Hence, our increases were measured and gradual. In fact, they were smaller and slower than rate adjustments made around the region in the past year.
We even paused twice to assess the cumulative impact of our OPR increases last year. This is because monetary policy actions take time to transmit through the economy, and it was important to observe if there were signs that might suggest an over-tightening of monetary conditions.
The picture that we’ve gleaned at the MPC meeting on 3 May and other recent meetings is this: Our economy continues to show strength. The 5.6% GDP growth for 1Q 2023 was stronger than the pre-pandemic period. Hiring is also up.
We see various indicators highlighting the continued strength in domestic demand: retail spending, passenger car sales, tourist arrivals, and more.
Looking ahead, we expect our growth prospects to remain resilient based on many forward-looking indicators including loan growth, and insights from businesses across all sectors such as backlog orders, export orders and business outlook, to name a few.
MPC looks at a broad suite of indicators to form a view on the outlook for growth and inflation. MPC has to consider all relevant information, both global and domestic, holistically; it cannot consider data in isolation. This is crucial for MPC to make an informed judgment on the state of the economy.
The Purchasing Managers’ Index (PMI) along with other indicators, are tracked but individual indicators on its own cannot be the sole basis of determining an appropriate policy stance.
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