Interest rates to rise on July

interest rise

There has been news implicating the hike of interest rates in Malaysia. Economist predicts that OPR (Overnight Policy Rate) will hike of 25 points on July as Bank Negara will convey it’s MPC (Monetary Policy Meeting) while other predicts hike of 50 points by the end of 2014. The current OPR is set at 3.0% which is expected to rise to 3.25% by the next MPC meeting on 10th July 2014.

The hike is expected due to higher than average first quarter 6% GDP growth in Malaysia as industrial output growth and rebound of exports.

What does this means ? 

OPR (Overnight Policy Rate) is determined by Bank Negara, OPR changes may directly effects BLR (Base Lending Rate) which is determined by local banks. BLR  is use directly when determining the interest rates of loans from a bank to consumer. This means the rise of BLR which will means higher repayment for products such as variable interest rates home loans, fixed deposit, short and long term interest rates. OPR rise and fall will also have deep impact to a country’s economy.

Effects on Loans ? 

Loans such as Home Loans that is calculated based on variable interest rates which be directly effected. A mere 0.25% increase of BLR will cause extra 7% of interest repayment for a home loan of RM500,000 with 30 years tenure. There will be no effect to existing personal loan or car loan borrowers as the repayment and interest rates are already fixed the entire tenure. New loans products however may be subjected to higher interest rates due to increase of OPR.

Fixed interest rates vs Variable rates loan

Fixed interest rates loan may be able to protect a borrower from interest rates hike however this may work like a double edge sword. Malaysia has seen one of the lowest interest rates since 2009 and economist predicts this may not last forever.

At the time of writing, BLR is set to 6.60% for many banks in Malaysia. As OPR is set to increase 25 points to 3.25% , bank may directly pass the cost increase to BLR at 6.85%. Bank Negara will also replace BLR with a new framework by the end of 2014.