You may have heard that Bank Negara Malaysia (BNM) recently cut the Overnight Policy Rate (OPR) to 1.75 per cent, the lowest level ever.
Everyone was talking about it when it happened, but what is OPR and how does it affect you?
Well, first of all, if you're a financial noob, jangan risau.
Our friends from Multiply are here to help you understand everything about the lower OPR and its impact to Malaysians.
The short answer is that lower OPR leads to lower interest rates, which means you’ll pay less interest for any flexible interest rate loans that you have. (YEAY!)
Buuuuuuuut, you’ll also be earning less from your savings and fixed deposits.
"How come ar?," we hear all of you asking.
Well, for the panjang and more detailed explanation, read on!
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?
Bank Negara uses the OPR to steer 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, the economy needs to speed up.
By cutting the OPR, it will lead banks to lowering their BR,BFR and 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.
Apart from loans and spending, the lower interest rates also encourage you to invest stocks and property which will give you a higher return compared to bank savings.
OPR and businesses
For businesses, cheaper borrowing means they can get a loan to maintain or grow their business.
It also gives business operators more reason to invest instead of leaving their cash in the bank.
Of course, this also helps protect the economy from a recession, because staying in business lets companies avoid retrenchments or pay cuts.
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 loan 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 existing loans.
You can also use Multiply's calculators to see how your repayments might change.
You will make less from your savings and fixed deposits
It's all not good news, though.
Interest rates are also used to reward you for saving. By lowering interest rates, Bank Negara is also encouraging you to take some money out from your 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 and BLR will 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 this Guide on Planning and Budgeting.
You can also visit Multiply.org.my to learn more about financial-related matters.