The Correlation Between OPR and BLR
This article uses terms which will be familiar to readers if they are residing in Malaysia.
BLR, or Base Lending Rate, quoted in percentage, simply put, is the cost of borrowing money from financial institutions for any man in the street.
For house buyers, this all may seem familiar – you want the lowest interest rate for your mortgage loan. However, at any given time, BLR is fixed, so the only variable in this equation is the percentage discount (BLR minus) or premium (BLR plus) from the BLR rate.
Overnight Policy Rate or OPR refers to the interest rate at which a financial institution lend liquid funds (closest obtainable money) to another financial institution overnight. This rate is determined by a central bank–as in Malaysia, Bank Negara–during its Monetary Policy Meeting, and it is a uniform rate for which edges can access short-term financing from central bank depositories.
The BLR is modificated in correlation to OPR. The cause and effect of OPR adjustment is great in terms of micro and macro economics, but suffice for this post here to illustrate the direct factors and effects.
A hike in the cost of borrowing has the intention of slowing down consumer need and spending in a overheated economy, usually characterized by a steadily increasing inflation rate, uptrending proportion market and business activity. Example, the recent 25 bps in OPR translates into 35 bps in BLR at 6.60%.
Think of it this way in layman’s terms – when it costs more to borrow, consumer spending strength will reduce. need-pull inflation is partly pushed up by up-spiralling consumer need, so when money supply drops, prices will keep steady (or drops) in theory. Bear in mind that increase in money supply is usually the dominant factor for need-pull inflation, so hiking the OPR is probably the most effective way.
Raising the OPR rate, consequently, must be timely else the economic growth will also be hindered. It is a double-edge sword.
The reverse is true during recession. In order to stimulus consumer spending in a lethargic economic condition, central bank will cut OPR to increase money supply in the market.
The other thing observed from this is the almost equivalent increase in bps for risk-free asset rate of return, reflected in edges’ short term Fixed place Rate or Malaysia Government Securities (MGS) coupon rate. This is good news for ultra conservative or risk negative investors.
**bps = basis points. One basis point is equivalent to 0.01 percent.
**OPR is also known as interbank offered rate in other countries