Raising OPR not an effective tool to strengthen ringgit, say economists

• The last time Bank Negara Malaysia raised the OPR was in May, instituting a 25 bps hike to 3%, from 2.75%.

KUALA LUMPUR (Oct 31): Raising the overnight policy rate (OPR) is not an effective tool in strengthening the ringgit, according to panellists at the RAM Forum 2023.

“About using OPR to defend the currency, it is probably not ideal, if I may say, [it is] not effective,” said Maybank Investment Bank head of fixed income research Winson Phoon.

The topic was brought up at the forum here on Tuesday as the ringgit continues to slide, recently depreciating to about 4.76 to the greenback to a near 25-year low.

Phoon explained that raising the OPR might not yield the desired outcome, especially when the US continues to tighten its monetary policy.

“If we look at Indonesia — which raised its interest rates recently — and uses interest rates to defend its currency, but we have seen that the US keep tightening, and this [raising OPR] is not the best tool,” he opined.

Bank Indonesia increased its seven-day reverse repurchase rate by 25 basis points (bps) to a fresh four-year high of 6% earlier this month.

The last time Bank Negara Malaysia (BNM) raised the OPR was in May, instituting a 25 bps hike to 3%, from 2.75%.

The central bank will hold its last monetary policy committee (MPC) meeting for this year on Nov 1 and 2.

Bank Muamalat Malaysia chief economist Dr Mohd Afzanizam Abdul Rashid is also against the idea of increasing the OPR as it could potentially lead to adverse economic consequences.

“I totally disagree that we are using OPR to address the currencies, I think it will backfire because we can see that the economy is struggling when OPR is increased,” Mohd Afzanizam said.

Instead, he suggested looking into strengthening policies as an approach to shore up the weakening ringgit.

"I think whatever you do, you need to be mindful of your policy objectives and the implications, and interest rate is a blunt tool — to me, the ringgit is like a share price [stocks] which reflects the company's performance.

“I think the ideal situation is to focus on what you do best and the outcome will be the deciding factor whether the currency will appreciate or otherwise — this is the best way of dealing with this currency weakness,” he suggested.

Earlier in Parliament, Prime Minister Datuk Seri Anwar Ibrahim said that raising the OPR is not the only solution for addressing the depreciation of the ringgit and expressed concern that raising the key rate could impact small businesses.

Moreover, he said that Malaysia's economic indicators remain healthy as inflation and unemployment rates are still relatively low, while the economy and investments are steadily growing.

Looking to buy a home? Sign up for EdgeProp START and get exclusive rewards and vouchers for ANY home purchase in Malaysia (primary or subsale)!