The Overnight Policy Rate (OPR) is the interest rate that commercial banks charge for lending excess reserve to another commercial bank. Central Bank of Malaysia (BNM) determines the OPR. According to the article Monetary Policy Meeting (n.d.), “The reason why Malaysia uses OPR as one of its monetary policy is because OPR triggers a chain of many events such as: the Base Lending Rate (BLR), short-term interest rates, fixed deposit rate, foreign exchange rates, long term interest rates, the amount of money and credit and ultimately a range of economic variables, including unemployment, output, price levels and inflation which are the micro and macro factors on the economics of Malaysia.” The other three tools are Discount Rate, Reserve Requirements (R.R) and Open Market Operations (OMO).
By using the three other tools, the BNM influences the demand for, supply of, balances that depository institutions hold at BNM and in this way it alters the OPR. Giving an example, if the discount rate is lowered, it reduces the cost of borrowing of consumers from commercial banks and this encourages commercial banks to borrow reserves from the BNM. With that being said, OPR decreases and thus it increases the money supply in the economy. This applies when unemployment rates are high and when a country is facing recession. On the other hand, if BNM were to increase the discount rates then thus it increases the cost of borrowing of consumers from commercial banks and there will be less demand of excess reserves because the OPR will increase. This applies when the country is facing inflation. The following graph shows the relation between BLR and OPR.
Graph of OPR and BLR
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...towards neutralizing the monetary conditions and preventing the risk of financial imbalances that could destabilize the economy recovery process. At the new level of the OPR, the standpoint of monetary policy continues to remain supportive to the economic growth. In conclusion, BNM raise OPR in order to overcome inflation and in opposed to recession, BNM reduces the OPR.
Financial Glossary: Monetary Policy Meeting. (n.d.). Retrieved March 30, 2011, from http://www.realestateagent.com.my/Financial%20Glossary/Monetary%20Po licy%20Meeting.htm.
OPR Decisions & Statements: Monetary Policy Statements. (2008). Retrieved April 3, 2011, from http://www.bnm.gov.my/microsites/monetary/0401_20081124.htm.
OPR Decisions & Statements: Monetary Policy Statements. (2010). Retrieved April 3, 2011, from http://www.bnm.gov.my/microsites/monetary/0401_20100304.htm
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