The Overnight Policy Rate (OPR)
The Overnight Policy Rate (OPR) is the interest rate that commercial banks charge for lending excess reserve to another commercial bank. Central Bank of Malaysia (BNM) determines the OPR. According to the article Monetary Policy Meeting (n.d.), “The reason why Malaysia uses OPR as one of its monetary policy is because OPR triggers a chain of many events such as: the Base Lending Rate (BLR), short-term interest rates, fixed deposit rate, foreign exchange rates, long term interest rates, the amount of money and credit and ultimately a range of economic variables, including unemployment, output, price levels and inflation which are the micro and macro factors on the economics of Malaysia.” The other three tools are Discount Rate, Reserve Requirements (R.R) and Open Market Operations (OMO).
By using the three other tools, the BNM influences the demand for, supply of, balances that depository institutions hold at BNM and in this way it alters the OPR. Giving an example, if the discount rate is lowered, it reduces the cost of borrowing of consumers from commercial banks and this encourages commercial banks to borrow reserves from the BNM. With that being said, OPR decreases and thus it increases the money supply in the economy. This applies when unemployment rates are high and when a country is facing recession. On the other hand, if BNM were to increase the discount rates then thus it increases the cost of borrowing of consumers from commercial banks and there will be less demand of excess reserves because the OPR will increase. This applies when the country is facing inflation. The following graph shows the relation between BLR and OPR.
Graph of OPR and BLR
Retrieved from: http://www.bebas-hutang.com/blr-is-going-up/
Giving another example situation of how R.R and OMO affects OPR. Assuming a situation whereby the country is facing recession. The BNM then buys bond in the open market, thus, increasing the money supply in the market. This will lead to commercial banks having excess reserves and the demand for commercial banks for borrowing reserves decreases and OPR will then decrease too. As apposed to recession is inflation, when inflation occurs, BNM will sells bond in the open market and therefore it decreases the money supply in the market. Therefore, more people will perform loan from commercial banks and the demand of commercial banks for borrowing excess reserves increases and OPR increases in order to prevent insufficient reserves which would then lead to financial crisis.
The following table shows the OPR from year 2007-2010
OPR Decisions & Statements
The Overnight Policy Rate (OPR) to date.
Overnight Policy Rate (OPR)
Date Change in OPR (%) New OPR level (%) Monetary Policy
12 Nov 2010 0 2.75 View statement
2 Sep 2010 0 2.75 View statement
8 Jul 2010 +0.25 2.75 View statement
13 May 2010 +0.25 2.50 View statement
4 Mar 2010 +0.25 2.25 View statement
26 Jan 2010 0 2.00 View...