The Cause & Effect of Business Cycle

Coming from a non-financial background, it took me a while to put together all the pieces of what I knew. This should be the simplest flowchart to explain the business cycle if you are not an investment banker. Let me know of any blunders.

Click to enlarge

Lesson 2: APR - The Real Cost of Credit Card Annual Interest Rate

Read the basic difference between APR and AER before continue reading the below.

Refer to the annual interest charges for Maybank credit cards.

Assume you are one of those who constantly spend more than you earn and frequently misses your payment, putting yourself in Tier 3 bracket of 17.5%.

Say, you have outstanding balance of RM 10,000, so you'll think (I did previously) that, even if I don't pay a single cent for the next 12 months, by the 13-th month, I would need to pay 117.5% x 10,000 = RM 11,750. Or, you think, every month, I will be charged a monthly interest of 17.5% /12 = 1.4583%

Not quite that simple. Confused? Let's solidify the concept with an example below.

Remember, you get your credit card statement monthly - your outstanding balance plus interest incurred previously will be carried forward to the subsequent month. That means, the compounding period is monthly!

OPR, BLR & Inflation - The Correlation

BLR, or Base Lending Rate, quoted in percentage, simply put, is the cost of borrowing money from financial institutions for any man in the street.

For house buyers and buyers, this all seem familiar - you want the lowest interest rate for your mortgage loan. However, at any given time, BLR is fixed, so the only variable in this equation is the percentage discount (BLR minus) or premium (BLR plus) from the BLR rate.

Overnight Policy Rate or OPR refers to the interest rate at which a financial institution lend liquid funds (immediately available money) to another financial institution overnight. This rate is determined by central bank, as in Malaysia, Bank Negara Malaysia during its Monetary Policy Meeting and it is a standardized rate for which banks can access short-term financing from central bank depositories.

The BLR is adjusted in correlation to OPR. The cause and effect of OPR adjustment is vast in terms of micro and macro economics, but suffice for this post here to illustrate the direct factors and effects.

Hike in the cost of borrowing has the intention of slowing down consumer demand & spending in a overheated economy, usually characterized by a steadily increasing inflation rate, uptrending share market and business activity. Example, the recent 25 bps in OPR translates into 35 bps in BLR at 6.60%.