Relationship between overnight policy rate, overnight interbank rate, overnight islamic interbank rate.error correction models and granger causality study / Abdul Razak Jambari, Suhana Mohamed and Mohd Azim Sardan

In managing monetary policy Bank Negara Malaysia (BNM) has to use the Overnight
Policy Rate (OPR), which was introduced in 2004. Changes in the OPR rate will
cause a chain of events that affect other interest rates available in the market such as
short term interest rate, long term interest rate, short term profit rate and long term
profit rate to change .One of the key success factor in managing monetary policy is
the ability to understand the relationship between operational targets and ultimate
target. Monetary operation of BNM will target the overnight interbank rate (OICR).
Liquidity management will target at ensuring the appropriate level of liquidity that
would influence the OICR to move close to the OPR. The aims of the paper are to
examine the interaction between OPR and OICR in the existence of Islamic variable
known as Overnight Islamic Interbank Rate (OIIR). Unit root, co integration and error
correction modelling has been applied on the data set to find the short-run and long run
relationship between OPR and the interest rates/profit rate. It has been found that
there is great amount of heterogeneity in the pass-through among various interest
rate/profit rates. This difference is found both in terms of degree and speed of
adjustment.