Bank Negara Malaysia's Monetary Policy

The monetary policy tools conducted by Bank Negara Malaysia are divided into two categories, qualitative and quantitative tools. The quantitative tools are precisely measured by outflow and inflow of money supply, that utilizing open market operation, discount rate or known as overnight policy rate in Malaysia, reserve requirement and so forth. Simultaneously, qualitative tools are associated with them to enhance effectiveness of quantitative tools.

Sources: General Information, Bank Negara Malaysia (BNM)

The interest rates are adjusted according to economic conditions and cycles. For example, when economy is overheating, and financial markets are in bubbles, the Bank Negara ought to raise the interest rate to tighten the monetary policy, the higher interest rate will encourage people to deposit more money in commercial banks while discourage spending money, and the higher interest rate would tighten the issuance of loan withdrew from commercial banks. Investors and institutions tend to be more conservative in financial market, speculation could be eliminated effectively. On the other hand, while economy are weak and need to be expanded, Bank Negara would lower the interest rate, to stimulate more borrowings and investment activities, people could withdraw loan from commercial banks with lower interest cost, they would tend to spend more and deposit less money, the higher consumption and investment would lead to economic growth. Apart from economy, price stability is the fundamental goal of Bank Negara, the interest rate adjustment are effective to tackle inflation led by overheating economy and skyrocketing oil and commodities prices (BNM, General Information, 2003)

In Malaysia, differed from United States, the interest rates are mainly dependent on open market operation (OMO), our country’s interest rate apply Overnight Policy Rate (OPR) as the target rate or principal instrument instead of OMO. The OPR are the discount rate of central bank that determines the lending and borrowing cost of interbank market, which among commercial banks from Bank Negara Malaysia. The OPR rates would bring domino effect within money market rates. The increasing OPR would influence commercial bank to increase Base Lending Rate (BLR), short term borrowing rates, fixed deposits rates and so forth.

In year 2009, the Central Bank of Malaysia Act 2009 are enacted to authorize monetary policy operation to a new committee of Bank Negara Malaysia, known as “Monetary Policy Committee” or MPC in short form. Monetary policy meeting are held periodically to announce updated monetary policy with Monetary Policy Statement. In the statement, latest OPR would be included together with economic assessment, for example price stability, financial market performance, and international finance and so forth (LAWS OF MALAYSIA, Act 701, 2009). The Act has given a new definition of monetary policy, “In promoting monetary