Bank Negara Malaysia (BNM) announces today the introduction of a new interest rate framework. The new interest rate framework represents a change in the system of implementing monetary policy and promotes more efficient pricing by banking institutions. It does not represent a change in monetary policy. Therefore, the introduction of the new framework is not expected to lead to any change in the general level of domestic interest rates.
The transition to the new interest rate framework is timely in view of the favourable economic and financial environment and the more developed financial infrastructure. This environment accords the best potential for the smooth and efficient transition to the new framework. This is reinforced by greater transparency, enhanced customer financial literacy and avenues for customer redress.
The new framework is 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.
The new framework would also achieve greater efficiency in the operation of the financial markets and hence, facilitate more effective and efficient pricing of financial products. The proliferation of structured and customised products has called for differentiated pricing. It is no longer feasible to prescribe standard pricing across the entire spectrum of banking products. Systems and guidelines have been introduced to provide an environment that would ensure fair and just pricing.
The New Monetary Operating Procedures
The main features of the new monetary operating procedures are as follows:
a) The Overnight Policy Rate
The Overnight Policy Rate (OPR) will be the indicator of the monetary policy stance. The OPR will have a dual role – as a signalling device to indicate the monetary policy stance and as a target rate for the day-to-day liquidity operations of the Central Bank. Any change in the monetary policy stance would be signalled by a change in the OPR. It will serve as the primary reference rate in determining other market rates. To reflect the unchanged stance of monetary policy, the OPR will be set at the current interbank overnight rate of 2.70%.
b) Overnight rate as the sole operating target
Monetary operations of BNM will target the overnight interbank rate. Liquidity management will aim at ensuring the appropriate level of liquidity that would influence the overnight interbank rate to move close to the OPR. Liquidity operations will also be conducted at other maturities but without targeting a specific interest rate level. Therefore, interbank interest rates at other maturities would be market determined, reflecting overall demand and supply conditions in the money market as well as interest rate expectations.
c) Introduction of Overnight Operating Corridor and Standing Facilities
To minimize excessive volatility in the overnight rate, Bank Negara Malaysia will specify a corridor around the OPR. The corridor is set at ± 25 basis points around the OPR. Day-to-day liquidity operations will aim to hold the overnight rate close to the announced OPR. A standing facility is introduced to ensure that the overnight interbank rate fluctuates within this corridor by providing a lending facility at the upper limit of the operating band and a deposit facility at the lower limit of the operating band. Market participants will transact among interbank institutions at a rate within the operating band to meet their short-term liquidity needs before utilising the standing facility.
Residual overnight liquidity surplus or shortage positions will be met by the standing facilities from the Central Bank. With the OPR set at 2.70%, the upper limit will be 2.95% and lower limit will be 2.45%. The standing facilities are available to all interbank institutions at their request.
d) Change in OPR is announced through the Monetary Policy Statement
Any change in the OPR will be announced in the Monetary Policy Statement (MPS). The MPS is issued at a pre-determined quarterly interval to coincide with the releases of Malaysia’s quarterly GDP performance. In the intervening period between the fixed scheduled dates, should there be a change in the monetary policy stance, an additional MPS would be issued.
Lending and Deposit Rates
a) Lending Rates
Under the new framework, each banking institution will now announce its own BLR based on its cost structure and business strategies. Banking institutions will also no longer be subject to the maximum spread of 2.5 percentage points above BLR. This is aimed at promoting more efficient pricing of the spectrum of financial products being offered.
BNM will continue to monitor the lending rates charged by banking institutions. To ensure fair and just pricing, parallel measures have been put in place to safeguard customer interests. These measures include prescribing minimum disclosure standards and providing avenues for customers to seek redress. This is reinforced by a 10-year consumer education programme and strengthened surveillance of the financial sector by the Central Bank.
In addition, to ensure that certain sectors have access to financing at reasonable costs, the prescribed lending rates under the following initiatives will be maintained:
- Special Funds for SMEs, which provide financing to SMEs at below market rates, ranging between 3.75% and 5%;
- Lending Guidelines to Priority Sector, which impose a maximum lending rate on housing loans obtained by those in the lower income group for the purchase of houses priced at RM180,000 and below. Currently, the cap is the lower of BLR+1.75% or 9%; and
- Guidelines on Credit Card Operations, which prescribe the maximum lending rates on credit card loans of 18%
Further measures that will be introduced include:
Greater product transparency and disclosure requirements
- To facilitate customers in making well-informed decisions, banking institutions will be required to disclose pertinent information on products and services being offered. Requirements cover amongst others, information relating to lending rates, fees and charges, as well as information on the risks associated with specific financial products and services.
- A “Comparative Table” will be introduced in the Bankinginfo website to facilitate banking customers in making comparison of rates among banking products.
Strengthening infrastructure for consumer redress
- The existing consumer redress mechanism will be enhanced further by the establishment of the Financial Mediation Bureau (FMB) to serve as the centre for resolution of a broad range of retail consumer issues raised against financial institutions regulated by BNM. The FMB will have regional offices to enhance access to its services nationwide.
b) Deposit rates
- Greater product transparency and disclosure requirements
The minimum rates for fixed deposits with tenures between 1 and 12 months for balances of RM1 million and below will be prescribed at the current prevailing levels of 3% for the one-month deposit and 3.70% for 12-month deposit. The minimum fixed deposit rates are being prescribed to ensure that depositors have a positive real rate of return.
- The changes introduced above will ensure more efficient implementation of monetary policy and more efficient pricing in the banking system. This new framework is being introduced at a time when the monetary policy stance can remain unchanged for some time to come.