The correlation between OPR and BLR
This article uses terms that will be familiar to readers if they are based in Malaysia.
BLR, or Base Lending Rate, quoted in percentage, simply put, is the cost of borrowing money from financial institutions for any man in the street.
For homebuyers, this may all sound familiar: you want the lowest interest rate on your home loan. However, at any given time, BLR is fixed, so the only variable in this equation is the percentage discount (BLR minus) or premium (BLR plus) of the BLR rate.
The Overnight Policy Rate or OPR refers to the interest rate at which a financial institution lends liquid funds (immediately available money) to another financial institution overnight. This rate is determined by a central bank, such as in Malaysia, Bank Negara, during its Monetary Policy Meeting, and is a standardized rate by which banks can access short-term financing of central bank deposits.
The BLR is adjusted in correlation to the OPR. The cause and effect of the OPR adjustment is huge in micro and macro economic terms, but this post is enough to illustrate the direct factors and effects.
An increase in the cost of borrowing is intended to slow consumer demand and spending in an overheated economy, typically characterized by a steadily rising inflation rate, bullish stock markets, and bullish business activity. Example, the recent 25 bps in OPR translates to 35 bps in BLR at 6.60%.
Think of it this way in simple terms: when it costs more to borrow, the purchasing power of the consumer is reduced. Demand-driven inflation is driven in part by rising consumer demand, so when the money supply falls, prices will theoretically stay flat (or fall). Keep in mind that the increase in the money supply is usually the main driver of demand-driven inflation, so increasing the OPR is probably the most effective way.
The OPR rate increase, therefore, must be timely, otherwise economic growth will also be stunned. It is a double-edged sword.
The opposite is true during the recession. In order to stimulate consumer spending in a sluggish economy, the central bank will lower the OPR to increase the money supply in the market.
The other thing to see from this is the almost equivalent increase in bps for the rate of return on risk-free assets, reflected in the banks’ Short-Term Fixed Deposit Rate or the Government Securities coupon rate. of Malaysia (MGS). This is good news for ultra-conservative or risk-averse investors.
**bps = basis points. One basis point is equivalent to 0.01 percent.
**OPR is also known as interbank offer rate in other countries