Increase in OPR will hit the poor the hardest


CALLING for Bank Negara Malaysia (BNM) to raise its overnight policy rate (OPR) just because central banks around the world have done so in the face of higher inflation, would be an utter disaster.

Inflation in Malaysia is generally caused by three factors: supply disruption, more people getting jobs, and stronger domestic demand, which would drive economic growth.

The increase in the consumer price index (CPI) has been due to price increases in specific components, ie oil, food and utilities for non-residential business users.

In fact, the inflation rate measured by the CPI rose to 4.7% in April 2021 due to higher oil prices and fell to 3.2% by December 2021, then to 2.3% in January and 2.2% in February and March 2022.

Headline inflation stood at 2%, which is well below the average inflation target under the 12th Malaysia Plan (2.7% during the 2021-2025 period).

While raising interest rates is mainly argued to combat so-called inflation, it must be done in an appropriate way.

First, supply disruption alone, mainly due to shortage in global production and out of our control, does not merit sudden hike in interest rate.

Second, the so-call improvement in labour market and strengthening of domestic demand does not necessarily mean the workers are doing better through higher wages.

After all, what many mainstream economists fear most is that the workers who receive higher wages will spend more in the economy, and this could lead to higher inflation, right?

Is it true that the overall wages will improve so much that it will lead to so much higher domestic demand hence higher inflation?

Apart from recent announcement on increase in minimum wage, it is highly unlikely.

Last year, our economy grew by 3.1%. The gross domestic product (GDP) for services sector also improved by 1.9%.

What happened to wages for workers in services sector, which employs a majority (64%) of our workers?

Sadly, their average wage declined by 2.4%. Wages reduced, although employment has increased, and domestic demand improved.

The increase in domestic demand has not meant that the workers are doing better and spending more.

The workers might be spending more due to relaxation of Covid-19 SOP and the endemic period in which we find ourselves, and not due to higher wages.

Now, raising interest rates could negatively impact lower income workers, particularly among those who are currently paying off their housing loans.

Existing environment of low income and higher food prices will not be helped by higher monthly commitment to pay housing debt.

Therefore, the hike in interest will make it worse, and lead to even lower disposable income.

The intervention needed is pretty simple and straight forward: a freeze on any increase on loan repayments for the low- and middle-income groups, effectively B80 income groups.

Maintain the previous rates. If the big banks can make billions of profits during pandemic with multiple rounds of moratoriums, what would make it bankrupt if there is temporary deferment on rate increase for low- and middle-income borrowers? – May 17, 2022.

* Press statement from the Social Protection Contributors’ Advisory Association Malaysia.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.


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