Effect of Reducing Overnight Policy Rate to Loan

This report discusses the effect of reducing the overnight policy rate (OPR) on the loan market and its impact on the economy. It examines the monetary policy imposed by the Bank Negara Malaysia and evaluates its effectiveness in promoting efficient lending. The report also explores the implications of the OPR on motor vehicle sales and highlights the benefits of reduced loan rates for consumers.

Effect of reducing
overnight policy rate to
loan

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Identification and evaluation of the overnight policy rate (OPR) and its impact on hire
purchase loan market...................................................................................................................1
2. Examination of the OPR in terms of monetary policy that is imposed by the Bank Negara
Malaysia.......................................................................................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Overnight policy rate (OPR) is one of the most important as well as crucial aspect as it
can help in reducing the rate of loan drastically that can help the economy of the country in a
positive way (Galindo and Steiner, 2020) . In this report there is a discussion of the OPR
imposed by the Bank Negara Malaysia and its possible impact on the overall working of the
economy. Apart from this the report also covers examination of the motor vehicle sales with
respect to the adjusted OPR. Further in this report there is an elaborated evaluation and analysis
of whether the above mentioned bank is emphasising the efficient monetary policy by reducing
OPR or not.
MAIN BODY
1. Identification and evaluation of the overnight policy rate (OPR) and its impact on hire
purchase loan market
Overnight rate is a rate at which one financial institution mainly bank lends or borrows
funds from other financial institution in the overnight market so that it can add value to the
economy of that country in the long run. It is generally set by the central bank so as to control the
monetary policy so that the target can be achieved and that too well within a limited time frame.
overnight interest rate is set up by the Bank Negara Malaysia (BNM) so as to control the day to
day liquidity of the funds in the open market.
It can be explained as if the central bank decides to reduce the overnight policy rate by
0.25% and bank stick to their present market profit that is there is no change from the bank side
then the loan's base rate would also reduce to 0.25% that will directly benefit the buyer
(Turguttopbas, 2017).
Also in terms of hire purchase which means buying of expensive goods on instalment
basis so if it is reduced as mentioned in the above paragraph then it will directly reduce the cost
to the consumer which will help in increasing the performance that is sales in the long run.
According to the data of Motor Vehicle Sales in Malaysia that has been elaborated below
there are appropriate impacts and suggestions given below according to it.
1

It can be seen from the above that the sales was hit due to pandemic and it was least in
April 2020 but with the implementation of OPR by the central bank of Malaysia which provides
cheaper rates to the citizens of the country it can be seen that there is a V- shaped recovery
because of OPR.
It is seen from the above that hire purchase which is generally regarded as car loan sees
an upward swing because of the reduces rates of loan and increased advantages which also helps
the motor vehicle sector to improve their conditioning which was degraded due to the pandemic.
2. Examination of the OPR in terms of monetary policy that is imposed by the Bank Negara
Malaysia
Monetary policy is the one that is adopted so that it can help in controlling and
maintaining the money supply in the economy so that it can help in striking a balance between
all the factors of the economy that affects its working in the long term context. It can be said that
Bank Negara Malaysia is emphasising on the efficient monetary policy since it is using the best
tools that is available in the market that is overnight policy rate which directly helps in reducing
the rate of lending and borrowing which makes the loan cheaper for the citizens of the nation and
further it helps in the improvement of the economy of the country. The OPR is fixed at 3.25%
that means the central bank will lend other financial institutions at this rate which is very low and
this will help the institution that take loan to generate more profits which can directly transferred
to the customers which helps in the overall improvement (Bats, Giuliodori and Houben, 2020).
2

The possible effect of reducing OPR to financial institutions is that they can earn more
profits and for the people of the nation the advantage is that it can help them to avail loan at
cheaper rate which can prove beneficial in the long term.
The Gross Domestic Product of Malaysia increased after the introduction of the concept
OPR as it helps in reducing the rate of interest and allowing the people of the country to have
more savings in their pockets which helps in increased expenditure on various other aspects that
helps in the overall growth and development in the long run.
It can be said that the government of Malaysia has taken an impactful decision in terms of
OPR and it helps all the institutions as well as the persons living there and hence it can be said
that few other measures like open market operation can also help in improving the performing of
the country in the market (Horst, Neyer and Stempel, 2020).
CONCLUSION
Overnight Policy Rate is a rate that is imposed by the Bank Nevada Malaysia and in it the
central bank reduces the rate so that it can help in reducing the rate at which other financial
institutions grant loans to the people of that nation. It can be concluded from the above that OPR
also helped the motor vehicle segment of the country too as it has increased the sales of that
market drastically within a short time period. Apart from that it can be concluded that Bank
Nevada Malaysia is implementing efficient monetary policy by reducing OPR since it is directly
beneficial for other banks as it helps in increased profits and to the citizens also as it helps in
reducing the rate of loan which increases savings of the people.
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REFERENCES
Books and journals
Bats, J., Giuliodori, M. and Houben, A. C., 2020. Monetary policy effects in times of negative
interest rates: What do bank stock prices tell us?. De Nederlandsche Bank NV.
Galindo, A. J. and Steiner, R., 2020. Asymmetric Interest Rate Transmission in an Inflation
Targeting Framework: The Case of Colombia. Borradores de Economía; No. 1138.
Horst, M., Neyer, U. and Stempel, D., 2020. Asymmetric macroeconomic effects of QE-induced
increases in excess reserves in a monetary union (No. 346). DICE Discussion Paper.
Turguttopbas, N., 2017. Perspectives on Monetary Policy and Cost of Capital: Evidence from
Turkey. Journal of Central Banking Theory and Practice. 6(2). pp.45-64.
(Galindo and Steiner, 2020) (Turguttopbas, 2017) (Bats, Giuliodori and Houben, 2020) (Horst,
Neyer and Stempel, 2020)
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