On 8 September, National Bank announced another rate hike of 25 basis points, which means that the overnight policy rate (OPR) was raised to 2.50% from the previous 2.25%. This is the third interest rate increase by the National Bank within this year and a further 0.25% increase in November and January next year cannot be ruled out.
Some people strongly agree with the Bank’s rate hike, others strongly disagree, while others believe that the Bank’s rate hike is not strong enough and should be increased by 50 to 75 basis points to prevent the continued devaluation of the Malaysian currency.
The Federal Reserve has previously sent a very strong and powerful message that it will implement the steepest rate hike in the next few months to curb the highest domestic inflation in the US in 40 years. If National Bank does not raise interest rates, then the Malaysian currency will depreciate further. The devaluation of the Malaysian currency will push up domestic inflation.
The biggest impact of the Bank’s interest rate hike will be that people will have to pay more for their monthly loans. Those who have time deposits will enjoy a higher rate of return.
With the announcement of the interest rate hike by the National Bank, these areas will be affected.
1. The movement of the Malaysian currency
The Federal Reserve has raised interest rates by 225 basis points over a period of seven months, which has led to an accelerated flow of US dollars back to the US and a record high level of the US dollar index. Emerging markets, on the other hand, are experiencing a shortage of US dollars, with emerging market currencies tumbling and the RM exchange rate hitting 4.50 levels. The announcement of an interest rate rise by the National Bank will hopefully give support to the Malaysian currency or at least not continue to depreciate.
2. Foreign Investment Direction
The Fed’s interest rate hike has led to an acceleration in the flow of foreign capital from emerging markets back to the United States, and the country is beginning to see a withdrawal of foreign capital, which may be slowed by the Bank Negara’s interest rate hike.
3. Higher interest rates on home and car loans
The interest rate you have to pay on your mortgage when you buy a house will increase and the banks in the country will also start to adjust their benchmark rate (BR) for mortgage loans and the interest rate you have to pay on your mortgage has increased. If your car loan is on a variable rate, the increase in interest rates by the national banks will also result in you having to pay more on your loan each month.
4. Less liquidity in the market can ease inflation
With the increase in interest rates on fixed deposits in banks, the general public will be more willing to keep their money in banks and therefore less money will flow in the market, which can also effectively curb inflation in the country. The public is also more cautious in spending after the interest rate increase, resulting in less liquidity in the market.
5. Increase in interest rates on time deposits
For those who prefer to keep their money in Fixed Deposit, the increase in interest rates by the National Bank will be beneficial to you as you will be able to earn more interest on your fixed deposits.
6. Increased pressure on REITs and real estate financing
If you are a REIT or real estate investor, there will be increased pressure on REIT and real estate financing, which will lead to fluctuations in the share price of REITs and increased pressure on real estate investors to repay their loans.
