How Overnight Policy Rate (OPR) lowered to 3.25% Affect Us

PETALING JAYA: Bank Negara has cut its benchmark Overnight Policy Rate (OPR) by 25 basis points to 3.25% from 3.50%, and signalled it was ready to cut the rate further.

This was the first rate cut in over five years. The move, which can be considered well-timed as the economy slows, will result in a lower cost of funds for banks. This, in turn, brings down the cost of borrowing for consumers.

With the OPR set at 3.25%, the upper limit will be 3.50% and lower limit will be 3.00%. Interestingly, you might have noticed that the BLR of banks is set 3% more than this upper limit, and short term fixed deposit rate is set close to the lower limit, while long term fixed deposit rate (1 year or above) is set close to the upper limit.

In fact, under the new framework, each banking institution can announce its own BLR based on its cost structure and business strategies. Banking institutions are also no longer be subject to the maximum spread of 2.5 percentage points above BLR. As a result, you might have noticed that the BLR of certain bank is a little bit different from the majority counterparties.

When the OPR is low, more money is released to flow into the market, and expected to stimulate the economic activities. On the other hand, when the OPR is high, more money will flow back to Bank Negara, and expected to slow down the economic activities. This is seen as a way to control the inflation rate.