THE Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has followed most other international central banks and raised the overnight policy rate (OPR) by 25 basis points (bp) to 3%.
This is the first time BNM has raised interest rates since November last year, at a time when the MPC expects economic growth to continue.
The MPC is holding to its forecast that domestic demand will continue to expand in 2023.
Local banks were very quick to respond to the BNM move, where RHB, Public Bank, Affin Bank, Maybank, and Hong Leong Bank have all raised their lending rates to between 6.45 and 6.75%. The Islamic banking sector has followed suit.
This brings interest rates back to November 2019 levels.
However, there are a number of uncertainties over the next few months, where Europe and the US may slide into recession, and the Ukraine conflict is continuing and looking like a long-term war.
Households and businesses are not as robust as they were in 2019, still suffering financial strain during the MCOs during the pandemic, where many workers lost income and jobs for long periods of time while increasing their debt levels.
The level of savings within the community is now very low, as households have not yet had time to replenish them.
While BNM is upbeat on domestic economic growth, there are a number of potential collateral effects from the OPR rate hike that will affect households and, small and medium-sized enterprises (SMEs) alike, which could strain both sectors, and pull down the positive trajectory of the economy.
If this were to occur, it would be devastating to the Prime Minister Datuk Seri Anwar Ibrahim-led government.
The rate risk will start to flow on to mortgage holders within the next month, who will have to pay more to service their loans. This will strain many low to medium-income earners who are already struggling to make ends meet through the current bout of rising living costs.
These higher rates could also dampen demand for housing, as prices rise and the cost of money increases. These interest hikes will also eventually flow onto rents, making it more expensive to rent a house.
While the interest hikes will increase household debt, they will also have the effect of creating lower relative wages and thus lower aggregate household demand across the nation. This will flow on to businesses, which could experience lower demand for their products and services later in the year.
SME costs will also rise due to the increased cost of debt. This could eventually be passed onto consumers, adding to the general rate of inflation. Businesses may find it more difficult to borrow. Rising debt will also squeeze SME liquidity, slowing down the circulation of money and making it more difficult for businesses to settle their trading debts with other businesses. This could lead to a general credit squeeze in the economy.
The effect of higher interest rates, relative lower income, and higher debt will also increase the wealth gap between lower-middle income and upper-middle income groups. This means more people will fall into relative poverty if a downward spiral of debt and financial hardship occurs.
If aggregate household demand and tourism flatten instead of growing as forecast, there is a good chance that interest rate rises will pull Malaysia into a light recession. There will not be any long-term increase in the strength of the Ringgit against its trading partners, because most have also raised their own interest rates, leaving the Ringgit with no comparative advantage over other currencies.
Furthermore, this interest hike will hit the very groups that need financial assistance the most. These are also the groups that supported Pakatan Harapan.
The prudence of BNM in raising interest rates just before six state elections involving 45% of the nation’s eligible voters must be questioned. The ‘unity government’ is now campaigning for large sections of the community, who have been dealt a big financial blow from the interest rate rise.
BNM’s decision will cause more financial suffering within the community, where there is a large risk that voters may take their anger out on the government at the coming round of state elections. — May 4, 2023
Australia-born Murray Hunter has been involved in Asia-Pacific business for the last 40 years as an entrepreneur, consultant, academic and researcher. He was previously an associate professor at the Universiti Malaya Perlis.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
