Chong said the increase in interest rate will slow down the economy, and this is a fundamental economic principle. – Bernama photo

KUCHING (May 13): Bank Negara Malaysia’s (BNM) decision to increase the Overnight Policy Rate (OPR) by 25 basis points to two per cent comes as a surprise to most economic analysts, said Chong Chieng Jen.

The Sarawak Democratic Action Party (DAP) chairman said the increase in interest rate will slow down the economy, and this is a fundamental economic principle.

“At such an early stage of re-opening our economy where we are still a far shot from recovery to the 2019 level, the decision of BNM to increase interest rates will impact negatively on the country’s rate of economic recovery,” he said in a statement today.

Chong, who is Stampin MP and Padungan assemblyman, noted that the rationale of BNM for the policy to increase the interest rate was to stabilise prices and control inflation.

He said while the intention may be noble, the increase in interest rates at this time will likely not achieve the purpose of price stabilisation.

He said this was because the main reason for the country’s current inflation was due to supply-push factor, not so much as demand-pull factor.

“In the last one year, the prices of raw materials have sky-rocketed, including freight charges, fertilisers, animal feeds and building materials.

“This has led to the overall price increases in all goods, especially food items. The problem was made worse by a weak Ringgit,” pointed out Chong.

Against this inflationary economic background, he said the government implemented the new minimum wage rate, up from RM1,200 to RM1,500.

He said that such a huge and sudden increase in wages will add on to costs of business while at the same time increase the purchasing power of general consumers.

He stressed that both had an inflationary effect on the price of goods.

“Therefore, the BNM’s 25 basis point increase in OPR will likely not have its impact on price stabilisation. On the contrary, it will slow down our economy and recovery.

“Furthermore, it will directly impact all borrowers of bank loans, housing loans, business loans, hire purchase agreements and credit card loans.

“For a housing loan of RM200,000, an increase of 25 basis points will entail an increase of RM500 per annum interest. This increase in OPR will hit on almost all households,” he said.

According to Chong, BNM’s latest report shows that Malaysia’s household debt-to-Gross Domestic Product (GDP) ratio as at December last year was 89 per cent.

He said this was extremely high if compared to other countries in the region.

As at December last year, Singapore’s household debt-to-GDP ratio was 69.7 per cent, Indonesia’s was 17.2 per cent and the Philippines’ was 9.9 per cent, he added.

“In layman’s terms, most households in Malaysia have bank loans and thus the increase in OPR means that all these families will have to pay more in their monthly installments to the banks.

“It is thus not a wise move of the BNM to increase the OPR at this early stage of economy reopening. It is likely to slow down the economy, increase costs of business and increase the financial pressure of debt repayments for all,” Chong said.