Understand what is OPR and how it affects us

Overnight Policy Rate (OPR) is an overnight interest rate set by Bank Negara. This overnight policy rate or interest rate is a rate a borrower bank has to pay to a leading bank for the funds borrowed.  The current OPR set by Bank Negara is 3%.

You may wonder why a bank would be borrowing from another bank, but you must understand that bank makes money by lending money out and not by keeping money. Thus, bank will lend out as much money as possible in terms of loans, and maintaining the minimal cash as requested by Bank Negara.  However, in the event that cash withdrawal exceeded the amount of cash available, the particular bank will need to borrow cash from other banks, and make an interest rate, which is the OPR.

Increasing the OPR will immediately increase the cost of borrowing for banks, and thus, will lead to a chain effect.  This is how Bank Negara regulates the financial institutions and set the climate.

OPR increase will lead to increase in loan interest rate, meaning it will cost more to borrow now, thus, curtailing accumulation of personal and household debts.  Buying a car will cost more now when you factor in the interest rate, and servicing your housing loan will cost more as the interest rate has gone up.

Loan interest increasing would also means that Fixed Deposit Interest, Saving interest etc will increase in tandem too, thus, if you have substantial saving, increase in increase rate will help you earn more.