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MPC and its independent role in the OPR-setting policy

Dr Mohd Zaidi Md Zabri

By: Dr Mohd Zaidi Md Zabri

Bank Negara Malaysia (BNM)’s recent decision to raise the overnight policy rate (OPR) to 3.0% has sparked concerns among Malaysians regarding its potential impact on the economy.

In fact, gradual adjustments were made in May, July, September, and November of 2022–raising the OPR from its record low of 1.75% in July 2020–which is maintained for almost 2 consecutive years .

Proponents of the OPR increase argue that realigning the rate with pre-pandemic levels (3.00% in May 2019) is a prudent measure to address inflationary pressures and maintain financial stability. Besides, advocates of the higher OPR also suggest that it can help curb excessive borrowing, mitigate the risk of asset bubbles, and attract foreign investment.

By raising borrowing costs, the OPR acts as a deterrent to unchecked borrowing, reducing the likelihood of overleveraging and promoting responsible lending practices. Additionally, a higher OPR can enhance confidence among foreign investors, as it signals the commitment to maintaining a stable financial environment.

However, critics argue that the timing of the OPR increase, which do not align with the government’s economic recovery efforts that may weaken both consumer and business sentiments. They contend that higher borrowing costs may dampen private investment, potentially slowing down economic growth. Moreover, the burden of increased OPR falls on households and businesses already struggling with high levels of indebtedness, increasing the risk of loan defaults.

Consequently, there are growing calls, particularly from the borrowers, for the government to establish an annual plan regarding OPR increases and provide advanced notice to enable people to plan their expenses effectively.

Despite such calls, in reality, the government does not have any weightage or have the power to influence the country’s monetary policy because the decision on the increase (and decrease) of the OPR is fully controlled by the Monetary Policy Committee (MPC), BNM.

For the record, MPC is responsible for formulating, implementing, and managing the country’s monetary policy. The OPR rate–one of the key tools at the MPC’s disposal–directly affects borrowing costs for households, businesses, and the government. By adjusting the OPR, the MPC can influence credit and money supply, thereby managing inflation, economic growth, and financial stability.

In addition to the OPR, the MPC employs various monetary policy tools, such as open market operations and statutory reserve requirements, to further influence credit availability and cost in the country’s financial market. These measures allow the MPC to strike a balance between supporting sustainable economic growth and maintaining price stability, promoting a healthy economic environment for all stakeholders.

Above all, MPC plays a vital role in maintaining price stability and supporting sustainable economic growth. Guided by a transparent and rule-based framework, the MPC’s decisions are subject to public scrutiny, ensuring accountability and fostering public trust.

An important, yet often overlooked aspect of the MPC is its independence from political interference. A case in point, MPC members are carefully selected to ensure they have no affiliations with political parties or interest groups, enabling them to make data-driven decisions based on robust economic analyses. This autonomy fosters an environment conducive to sound monetary policy, aimed at the long-term benefit of the Malaysian economy.

The MPC comprises eight committee members, led by the Governor, Tan Sri Nor Shamsiah Mohd Yunus, along with three Deputy Governors and three Assistant Governors. The remaining two members are nominated by the BNM based on their expertise in economics, finance, and related fields from the academia, private sector, or other government agencies. These individuals are appointed by the Malaysian government and typically serve a fixed term of three years.

The BNM MPC members are highly skilled professionals with the necessary expertise and experience to make well-informed decisions on monetary policy. Their professionalism is crucial in driving economic development and preserving the stability of Malaysia’s economy.

The MPC and by extension, BNM reports directly to the Minister of Finance. This reporting structure ensures supervision and adherence to the mandate outlined in the Bank Negara Malaysia Act 2009.

It is also important to note that BNM operates with a high degree of independence and autonomy, particularly in formulating and implementing monetary policy. The BNM Act 2009 grants BNM the freedom to make decisions on monetary policy without interference from the government. For such reason, Section 22(2) of the BNM Act 2009 explicitly emphasizes the autonomy of the Bank in formulating and implementing the monetary policy as per the following clause, “The monetary policy of the Bank shall be formulated and implemented autonomously by the Bank, without any external influence.”

The provisions outlined in Section 22 of the BNM Act 2009, along with other relevant clauses, safeguard BNM’s independence and autonomy in the formulation and implementation of monetary policy. This independence is crucial in maintaining the credibility and effectiveness of BNM in achieving its primary objective of promoting monetary and financial stability in the country.

In addition to being accountable to the Malaysian public, BNM adheres to global standards and best practices through its membership in esteemed organizations such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). These memberships provide guidance and oversight on central banking practices and policies, ensuring that BNM operates in line with international standards.

On the other hand, to further enhance transparency and public understanding, BNM should take a more proactive approach by intensifying efforts to educate the public about the basic concepts of the OPR, the process for determining the OPR rate, and the impact of OPR changes on the majority of the population. This can be achieved through comprehensive financial literacy campaigns, both in physical and virtual formats. By doing so, BNM can empower individuals with the knowledge to make informed financial decisions and foster a stronger connection between monetary policy and the well-being of the people.

The author is a Senior Lecturer in the Department of Finance, Faculty of Business and Economics, Universiti Malaya.

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