THE 50-point hike in the overnight policy rate (OPR) by Bank Negara will see low income earners who are already facing high household debts, further impacted, an economist said.

Professor Rajah Rasiah, an economist at Universiti Malaya, said low-income earners may end up not being able to service their loans if the OPR goes up again.

He said it was pertinent that more fiscal policies to assist the poor are implemented, while also enabling businesses in the country who are still recovering from the Covid-19 pandemic.

“It is important to note that rising interest rates will raise loan servicing costs of borrowers, and it will affect the low income groups more than the middle and high income groups,” Rasiah told The Malaysian Insight.

“Interest rates being a macroeconomic instrument carries an economy-wide impact, and hence, will not spare the poor buyers still serving their loans. Raising the OPR further will only burden them more.

“As it is now, a significant share of the population in Malaysia are struggling with heavy household debt, which is largely accounted for by house and vehicle purchases, and children’s education.”

Making reference to the United States, Rasiah said that during the 2007-2008 financial crisis, in its attempt to stifle inflation, the US Federal Reserve increased its interest rates from 0.5% to 5.25%, ultimately stranggling US households.

“I hope our government learns from the US experience.”

Given that the current inflation is driven by domestic shortages of essential goods, the Russia-Ukraine conflict and foreign export bans, Rasiah said raising the OPR does little to counter the impact.

“It is important for the government to focus more on fiscal policies to assist the poor on the one hand, and enable small and medium farms in the country on the other hand,” he said.

“The latter should be seen as a long term plan as Malaysia’s food trade balance has experienced chronic deficits over the period 1989-2022.

“Hence, attempts to raise the OPR to contain inflation is not a viable strategy at this time.

“After all, banks have been enjoying windfall profits throughout the pandemic as CEOs and boards of directors have continued to enjoy a rise in remunerations.”

Depending on the area, Rasiah said the rental market could also be affected as homeowners try to pass the cost to tenants.

“Because the demand-supply conditions vary strongly with locations and the nature of low, medium and high cost homes, it is likely that rental rates of low cost homes would continue to grow in highly urbanised cities, such as Kuala Lumpur, Johor Baru, Georgetown and Petaling Jaya.”

Homeowners burdened by increase in OPR

Homeowners who spoke to The Malaysian Insight said the 50 point hike in the OPR has impacted their finances as they have to contend with the higher cost of living.

Suriah Moorthy, 32, a sales executive said he is feeling the pinch from the interest hike.

“With the inflation, with prices of food and goods rising, and now with this hike in OPR, I’m feeling the pinch,” he said.

“I do understand that the rate is somewhat similar to before the pandemic, but at that time we weren’t experiencing inflation.”

“Now, everything has gone up. Even with a pay rise, it feels like nothing.”

Moorthy, who is married with no children, took a 35 year loan to purchase a RM400,000 home in Nilai. His monthly instalment used to be RM1,674 but has now increased to RMRM1,819.

“If it (OPR) goes up again, its definitely gonna be tough for me. I might need to find a second income to cover the cost. I’m already considering it.”

Shah Suradi, 33, a business woman, said not only does she have to pay more to service her house loan, her children’s school fees have also gone up.

“It is very burdensome,” said the mother of three who lives in Shah Alam.

“Like it or not, I have no choice but to struggle and find money to pay all my bills and debts.”

“I may have to work overtime which is tiring. If I want to make more money, I have to take up delivery jobs such as Lalamove so that I have enough money.”

Shah bought her house for RM400,000 with a loan repayment period of 35 years. She used to pay RM1,820 monthly, this has now gone up to RM1,920.

Karen Ngeh, 28, who co-bought a RM880,000 condominium with a friend said she is not really feeling the effect of the hike as she is able to split the cost.

“We used to pay RM2,867, after the hike now we pay RM2,968,” Ngeh said.

“The hike hasn’t affected me as the property was co-bought with a friend.”

In May, the central bank increased the OPR by 25 points to 2%. Then in July, the OPR went up another 25 points to 2.25%.

Over the course of the Covid-19 crisis, the OPR was reduced by a cumulative 125 basis points to a historic low of 1.75% to support the economy.

Meanwhile, the inflation rate was 3.4% in June, driven by the food and non-alcoholic beverages (6.1%), transport (5.4%), and restaurants and hotels (5%).

Deputy Finance Minister Yamani Hafez Musa, however, told Parliament that the 50 points hike will not affect borrowers drastically.

Yamani said repayment for housing loans of RM300,000 over 35 years has increased RM85 per month while for housing loans of RM500,000 over 35 years, the additional repayment is only RM142 per month.

The Finance Ministry is currently monitoring the effects of the increase on consumer loan repayments. – August 9, 2022.