Learning Series: Economic Growth, Inflation And Interest Rates: They Are All Intertwined

Learning Series: Economic Growth, Inflation And Interest Rates: They Are All Intertwined

Sometimes, we read about GDP growth and think, “Okay, Malaysia’s economy is growing.”

Then we read about inflation and think, “Everything is getting more expensive.”

Then Bank Negara Malaysia announces the OPR and we ask, “Okay, what does this have to do with me?”

Actually, all three are very closely connected.

Economic growth, inflation and interest rates are like three people sitting at the same table.

What one does can affect the others.

And Malaysia gives us a very good example of how this works.

#1 WHEN THE ECONOMY GROWS, PEOPLE SPEND

Let’s start with economic growth.

When Malaysia’s economy grows, businesses generally sell more.

Companies invest. (they are positive about the future demand)

Factories produce more. (they want to capture the current demand)

Tourism improves. (Malaysia’s top in ASEAN for international tourist arrivals)

People earn incomes. (more than jobs, more money)

More jobs are created. (due to all the above)

And when people feel more confident about their jobs and income, they tend to spend more.

This is generally good.

In fact, Malaysia’s economy expanded by 6% year-on-year in Q2 2026, while growth for the first half of 2026 was 5.7%. Bank Negara said growth was supported by domestic demand and stronger-than-expected exports.

Great news, right?

Yes.

But there is a catch.

If everyone suddenly has more money and starts spending much more, while businesses cannot increase supply quickly enough, prices can start rising.

That brings us to inflation.

#2 ECONOMIC GROWTH CAN CREATE INFLATIONARY PRESSURE

Imagine there are 100 people looking to buy houses but only 20 suitable houses available.

What happens?

Prices can rise. The one who could pay highest will get the homes which were in shortage.

The same principle applies to the wider economy.

If demand grows much faster than the economy’s ability to produce goods and services, businesses may increase prices.

Employees will ask for higher salaries.

Businesses may face higher costs.

And eventually, we get more inflation.

But economic growth does not automatically mean high inflation.

Malaysia is actually a good example.

Despite strong economic growth, headline inflation was only 1.9% in July 2026, according to Bank Negara. The central bank said inflation remained contained despite external cost pressures.

That is quite interesting.

Malaysia is growing.

But prices are not exploding.

Why?

Because economic growth can happen through higher productivity, stronger exports, investment and increased production capacity — not just because everyone is spending more. Yes, you can say all you want but this is current number.

#3 THEN COMES THE INTEREST RATE

Now we come to the part that most of us notice.

The Overnight Policy Rate, or OPR.

Bank Negara uses the OPR as its key monetary policy rate.

Why?

Because changing interest rates influences borrowing and saving.

When interest rates are lower, loans generally become cheaper.

That can encourage people and businesses to borrow.

Someone may decide to buy a house.

A business may decide to expand.

A company may invest in new equipment.

Consumers may spend more.

All these activities can support economic growth.

But if the economy is overheating and inflation is becoming too high, higher interest rates can help cool demand.

Borrowing becomes more expensive.

People may postpone buying that expensive car.

Businesses may delay expansion.

Some households may reduce discretionary spending.

And eventually, demand pressure can ease.

This is why Bank Negara says monetary policy takes both inflation and economic growth into consideration.

#4 MALAYSIA’S OPR IS A GOOD EXAMPLE

Let’s look at what happened recently.

In July 2025, Bank Negara Malaysia (BNM) reduced the OPR by 25 basis points to 2.75%.

Why?

Because inflation was contained while there were concerns about external risks to Malaysia’s growth.

The lower OPR provided additional support to the economy.

And since then?

BNM has kept the OPR at 2.75% through its 2026 meetings up to September.

Think about what this means.

BNM does not simply say:

“Economy growing strongly? Increase interest rate!”

No.

It looks at the entire picture.

How fast is the economy growing?

What is happening to inflation? (if this is fast, it will try to slow it down)

What is happening globally? (if this is impacting us negatively, it will try to create incentives for people and business to spend and invest)

What are households doing?

What are businesses doing?

Are prices rising because of strong domestic demand?

Or because of external factors such as oil prices and supply disruptions?

This is why monetary policy is not as simple as “high inflation = higher OPR” or “slow economy = lower OPR”.

#5 WHAT DOES THIS MEAN FOR US?

For ordinary Malaysians, this relationship matters quite a lot.

Suppose you have a RM500,000 housing loan.

A change in borrowing costs can affect your monthly repayment.

If you are thinking of buying a property, interest rates affect how much you can comfortably borrow.

If you are running a business, financing costs affect your expansion plans.

If you have savings, interest rates also influence the returns available from deposits and other interest-sensitive investments.

And when the OPR changes, the effects do not necessarily appear immediately.

Bank Negara itself highlights that monetary policy works with a time lag. A change in OPR today does not instantly change economic activity or inflation tomorrow.

This is why Bank Negara has to look ahead.

#6 SO, WHAT IS THE “RIGHT” INTEREST RATE?

This is perhaps the most interesting question.

There is no permanently perfect OPR. Current OPR is indeed very low in the context of looking at today versus our historical numbers.

If interest rates are too low for too long, borrowing and spending could become excessive, potentially creating inflation and financial risks.

If rates are too high for too long, businesses and households may cut spending and investment, slowing economic growth unnecessarily.

So, monetary policy is really about finding a balance.

Enough support for economic growth, but not so much that inflation gets out of control.

And enough restraint to keep prices stable, but not so much that the economy gets unnecessarily squeezed.

SO, WHAT SHOULD WE WATCH?

For me, this is why we should not look at GDP growth, inflation or OPR separately.

Look at them together.

Malaysia currently gives us an interesting picture:

Economic growth is strong.

Q2 2026 GDP growth was 6%.

Inflation remains relatively contained.

Headline inflation was 1.9% in July and 1.9% in August 2026.

OPR remains at 2.75%.

Bank Negara considers the current monetary policy stance consistent with continued price stability and sustainable economic growth.

That is actually quite a healthy combination.

But things can change.

Global oil prices can change.

Geopolitical tensions can change.

Exports can change.

Consumer spending can change.

And inflation can change.

They affect our house loan, car loan, savings, investments, business, spending and even our property decisions.

The economy may look complicated.

But the basic idea is actually quite simple:

When the economy grows, demand can rise. When demand rises too much, inflation can rise. When inflation becomes a concern, interest rates may be used to cool things down. And when growth needs support, lower interest rates can help.

Yeah, economics is not just for economists.

It affects all of us.

Happy understanding the economy!

Stay updated at all time for free. Sign up for daily investment news updates (FREE since Nov 2013 and FOREVER). 

Please LIKE kopiandproperty.com FB page to get daily updates about the property market beyond kopiandproperty.com articles.