OPR reduction expected to increase cash flow, boost economic activity

SHAH ALAM - The recent cut in the Overnight Policy Rate (OPR) to 2.75 per cent is likely to increase disposable income and stimulate domestic spending.

Putra Business School economist Professor Dr Ahmed Razman Abdul Latiff said the OPR reduction would lead to lower interest rates on bank loans, which in turn would reduce monthly loan repayments and free up more cash for consumers and businesses.

"When there is no need to make high loan repayments, borrowers will have extra income each month. This means that cash liquidity in the market increases.

"The public will have more money. Theoretically, when there is more money, people will start spending more and this will invigorate business activity in Malaysia," he said.

Ahmed Razman Abdul Latiff.

Razman said the move by Bank Negara Malaysia (BNM) was also supported by the current low inflation rate of 1.2 per cent, which gave the central bank flexibility to cut rates without significantly pushing up the cost of goods.

"There is still room to reduce the OPR because when spending increases, prices of goods generally go up. When people spend, demand rises and prices follow. But since the current inflation rate is low, at 1.2 per cent, any increase will not be burdensome.

"If the inflation rates were high, BNM might take a different approach," he added.

Razman believed that the strategy aimed to inject more liquidity into the economy and help stimulate growth across various sectors.