What does low OPR mean to you?
OPR is Overnight Policy Rate, which is the interest rate at which a bank lends to another Bank. It is one of the monetary policies to stimulate / contract the economy and is set by Bank Negara Malaysia (BNM). When the economy is over-heated, BNM will tighten the monetary policy by increasing the OPR rate. However, when the economy is contracting, BNM will loosen the monetary policy by reducing the OPR.
When the OPR is reduced, it has the several effects below which can spur spending.
- Reduce the saving interest rate
When the OPR rate is cut 25bps, the fixed deposit and saving rate will be reduced accordingly. Bank savers will hence be disappointed as the interest received will be cut. The OPR cut, nevertheless, will not affect previous fixed deposits in place but on the new fixed deposits.
2. Reduce the loan interest rate
While the savers will be unhappy about the OPR rate cut, the loan taker will be happy as the loan interest will be reduced too. See the example below for better illustration:-
You can see that for 0.25% OPR cut, the loan taker of the loan of RM 500,000 is paying RM 71.50 less per month for his loan installment. Hence, following the OPR cut, people will spend more because less people will save in the bank due to low saving rate. Also, people will spend because it is cheaper to get a loan to purchase a house, a vehicle, etc. Spending will then stimulate the growth of different sectors which will in turn stimulate the general economy growth.
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