Strong growth revives case for OPR hike [WATCH]

KUALA LUMPUR: Bank Negara Malaysia may be nearing a turning point in its monetary policy as stronger economic growth fuels calls to normalise interest rates after a prolonged period of support for the economy.

Economists are divided on whether the central bank will raise the overnight policy rate (OPR) by 25 basis points to 3.0 per cent or maintain it at 2.75 per cent at its final Monetary Policy Committee (MPC) meeting of the year on Thursday.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the central bank might be inclined to raise the OPR by 25 basis points.

This is given the economy's strong performance in 2025 and so far this year despite external shocks, including US tariffs and the conflict in the Middle East.

He said the 25-basis-point OPR cut in July 2025 was a pre-emptive measure, while prevailing economic conditions now warranted a normalisation of monetary policy.

"If the OPR is kept unchanged, then the interest rate can be deemed too low at a time when economic growth is expanding above trend level. This could lead to speculative activities and excessive borrowings," he told Business Times.

Universiti Teknologi Mara senior lecturer Dr Mohamad Idham Md Razak said Bank Negara might prefer to keep the benchmark rate unchanged at 2.75 per cent in November and assess incoming inflation and economic data before considering normalisation in 2027.

He said a 25-basis-point increase to 3.0 per cent was possible, particularly given Malaysia's stronger-than-expected economic performance and the expansionary elements of 2027 Budget.

However, stronger economic growth alone might not be sufficient justification for an immediate rate increase, Idham added.

Malaysia's gross domestic product grew 5.3 per cent in the third quarter of 2026, reflecting continued resilience in domestic consumption, investment and export activities.

Meanwhile, headline inflation stood at 1.8 per cent in September, suggesting that price pressures remained manageable.

"My assessment is that Bank Negara may prefer to maintain the OPR at 2.75 per cent in November and assess incoming inflation and economic data before considering normalisation in 2027.

"The priority should be to preserve economic momentum while ensuring price stability and protecting household purchasing power," he said.

Tradeview Capital fund manager Neoh Jia Man also expects Bank Negara to keep the OPR unchanged on Thursday, citing benign inflation and softening consumer sentiment.

While acknowledging that economic growth remained solid and the central bank's policy guidance had turned firmer, he said there was no urgency for Bank Negara to adjust rates at this juncture.

Juwai IQI co-founder and group chief executive officer Kashif Ansari similarly expects the central bank to maintain the OPR at 2.75 per cent at this week's meeting, although he sees a 25-basis-point increase to 3.0 per cent in the first quarter of 2027.

He said economic growth had been stronger than expected since the previous MPC meeting, while inflation had remained lower than anticipated.

Kashif said Bank Negara governor Datuk Seri Abdul Rasheed Ghaffour had opened the door to a potential rate increase earlier this month, indicating that the central bank had more leeway to raise rates if price pressures emerged.

"He also said the current rate is about where it should be given the levels of inflation and growth he sees," Kashif said in a statement.

The MPC's decision, which will be announced alongside the monetary policy statement at 3pm on Thursday, will mark its sixth and final policy meeting for 2026.

Malaysia's OPR Moderate Against Regional Peers

Idham said Malaysia's OPR of 2.75 per cent remains relatively moderate compared with those of several regional economies.

"For comparison, Indonesia's policy rate is 5.75 per cent, the Philippines' benchmark rate is around 5.0 per cent, while Thailand's policy rate is 1.0 per cent.

"Singapore operates under a different monetary policy framework, focusing primarily on managing its exchange rate rather than setting a conventional policy interest rate.

"These differences reflect each country's inflation conditions, currency pressures and economic priorities," he said.

He said Malaysia should not raise or lower its OPR simply to match those of neighbouring countries, adding that Bank Negara's monetary policy should remain guided by domestic inflation, economic growth, exchange rate developments and financial stability.

A relatively stable OPR will also provide certainty for households and businesses when making borrowing and investment decisions, he said.

Meanwhile, Neoh said Malaysia's OPR of 2.75 per cent was at the lower end of the regional range, with Indonesia's policy rate at 5.75 per cent and the Philippines' at 5.5 per cent.

He said both countries were raising rates to address inflationary pressures and weak currencies.

Only Singapore, with its Singapore Overnight Rate Average (SORA) at 1.55 per cent, and Thailand, at 1.0 per cent, had lower rates than Malaysia, he added.

Borrowers Face Higher Monthly Loan Repayments

Idham said a 25-basis-point increase in the OPR could lead to a modest rise in monthly instalments for borrowers with floating-rate housing loans.

The actual impact will depend on their outstanding loan balance, remaining tenure and the extent to which banks adjust their lending rates.

He said while the increase might appear manageable for some borrowers, it could still affect households with tight monthly budgets, particularly younger homeowners and middle-income families.

"Therefore, financial institutions should communicate any changes clearly and encourage borrowers to review their financial commitments and maintain adequate emergency savings," he said.

Neoh estimated that, assuming a 30-year housing loan, a 25-basis-point increase will add about RM14 to monthly repayments for every RM100,000 borrowed.

This will translate into an additional RM42 a month for a RM300,000 loan, RM70 for a RM500,000 loan and RM112 for an RM800,000 loan, he said.

OPR Hike Carries Economic Trade-offs

Idham said maintaining the OPR at 2.75 per cent will help keep borrowing costs affordable, supporting household spending and business investment.

However, raising the rate to 3.0 per cent could help contain inflationary pressures, although it might moderate consumption and private investment.

He said a higher OPR will not immediately increase the cost of servicing all government debt, but sustained rate increases could raise borrowing and refinancing costs over time.

He added that Malaysia should adopt a measured, data-driven monetary policy to balance economic growth, price stability and affordable financing.

Neoh said keeping the OPR at 2.75 per cent will primarily support gross domestic product growth, although this could come at the risk of higher inflation, particularly with the minimum wage set to increase from mid-2027.

He said the impact of an OPR hike on government finances will be relatively small, as most federal government debt carried fixed interest rates, meaning an increase would only affect the cost of new borrowings.

Assuming total gross borrowings remain close to the Finance Ministry's 2026 estimate of RM207 billion, the additional financing cost will be about RM500 million a year, he said.

"This is a small fraction of the RM61 billion debt-servicing bill," he said.