Interest rate framework
The present interest rate framework was introduced to enhance the effectiveness of the monetary policy transmission mechanism, and, secondly, to promote more efficient pricing by banking institutions. The present framework is also designed to enhance the effectiveness of monetary policy by facilitating the transmission of changes in the policy rate to other market rates and, ultimately, to key macroeconomic objectives. This is achieved by adopting the overnight policy rate (OPR), a policy rate closely related to other interest rates and through appropriate monetary operating procedure changes. The OPR is now the main monetary policy stance indicator
Overnight Policy Rate (OPR)
The OPR was designed to enhance the effectiveness of monetary policy by facilitating the transmission of changes in the policy rate to the other market rates and ultimately, to key macroeconomic objectives. This is achieved by adopting a policy rate that is closely related to other interest rates and through appropriate changes in the monetary operating procedures. It was also designed to achieve greater efficiency in the operation of the financial markets and hence, facilitate more effective and efficient pricing of financial products.
Role of OPR
The overnight policy rate (OPR) is the indicator of the monetary policy stance and has a dual role:
§ As a signaling device to indicate the monetary policy stance; and
§ As a target rate for the day-to-day liquidity operations of BNM.
Any change in the monetary policy stance would be signaled by a change in the OPR. It serves as the primary reference rate in determining other market rates.
OPR is set by BNM, if OPR is reduced; the BLR of commercial banks will tend to be lowered as well thus reducing the average lending rates of financing to borrowers.
BLR (Base Lending Rate)
The base lending rate (BLR) refers to the average of the base lending rates that commercial banks and finance companies quote to their best customers.
BLR is a reference rate that banks uses as a basis to quote the banking products rate to customers. Currently, it is set by banks themselves, each banking institutions will announce its own BLR based on its cost structures and strategies in order to make their products become more attractive.
Essentially, the formula computation for the ceiling BLR is now based on the prevailing BNM 3- month intervention rate instead of the previous month’s average LIBOR. The current computed BLR formula is:
BLR for commercial banks
= [BNM intervention rate x 80%] + 2.25%
1 – SRR%
BLR for finance companies
= [BNM intervention rate] + 2.25%
1 – SRR%
Financial Stability
Financial stability refers to an environment where institutions in a financial system are strong and can continue to meet their contractual obligations without interruption or any external assistance. Market participants can also confidently enter into transactions at prices that do not change substantially over short periods when there has not been any change in market fundamentals.
Financial stability creates a conducive environment for businesses to undertake their activities and for savers and investors to enter into short-term or long-term contracts.
As the financial sector has a central role in promoting economic growth, it is important that the financial system be strong, resilient and efficient in mobilizing savings and undertaking lending activities. It is vital that this intermediation process continues uninterrupted even in periods of economic difficulties.
Financial stability can be achieved by developing a sound banking system made up of strong and resilient financial players and well-functioning financial markets that responds to the changing needs of the economy and society.
Financial stability can be also achieved by formulating a strong legal, regulatory and supervisory framework, as well as through the development and strengthening of new institutions and system infrastructure. Regulatory rules need to be continuously enhanced with the adoption of international standards to instill appropriate risk management systems to enable financial institutions to undertake their intermediation function effectively.
The enactment of new laws such as the Banking and Financial Institutions Act in 1989 and the Insurance Act in 1996 helped enhance financial stability. In addition, the availability of “lender of last resort facility” with Bank Negara Malaysia (BNM) (whereby banking institutions in need of funds could come to BNM to sell their securities to deal with short-term liquidity problems) could also enhance financial stability and maintain public confidence in the financial system thereby avoiding widespread failure.
