Rise in exchange rate volatility attributed to cyclical factors
Published on: Friday, March 24, 2017
Kuala Lumpur: A large part of the rise in exchange rate volatility in recent years can be attributed to cyclical factors, said Bank Negara Malaysia (BNM). It said these factors, such as the unprecedented introduction of unconventional monetary policies of the major developed countries in the post-crisis years and global developments had led to shifts in sentiments in the global financial markets. Nevertheless, it said the structural evolution of the global foreign exchange markets might have exacerbated the degree and persistence of exchange rate volatility.
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In recent years, emerging market currencies have experienced a significant rise in the volatility of their exchange rates, particularly after the financial crisis in the developed countries, BNM said in in its Annual Report 2016 released here, Thursday. It said this volatility had become increasingly persistent, to the extent that it has led to periods of an exchange rate disconnect, a situation that described prolonged deviations between exchange rate movements and the underlying economic fundamentals. The markets have grown bigger in size and had outpaced the growth of underlying economic activity, it said, adding that at the same time, market players and their behaviour had also evolved as the markets became more complex.These structural developments, coupled with structural rigidities such as the continued reliance on the US dollar, may have contributed to the increased volatility of exchange rates, it said.
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As exchange rate volatility become more pronounced and prolonged, BNM said it was important for policymakers to manage the trade-off between the benefits of allowing exchange rate flexibility to act as a shock absorber to the economy and the potential costs of allowing sharp adjustments in the exchange rate. While exchange rate flexibility is beneficial during normal times, it said policymakers must remain pragmatic, especially during periods of high uncertainty.
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As regulator, the central bank has a role to address structural imbalances that could lead to unwarranted distortions to the domestic foreign exchange market. It said correcting these imbalances would ensure that exchange rate movements remain orderly to support trade, businesses and genuine investors. Stay up-to-date by following Daily Express’s Telegram channel.
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