Bank Negara Malaysia on guard as it sees bumpy ringgit path
Published on: Wednesday, March 20, 2024
By:
Bloomberg, FMT
The ringgit’s weakness has been in large part due to the record differential between Malaysia’s key rate and the upper bound of the Federal Reserve’s benchmark.
PETALING JAYA: Malaysia’s central bank cautioned that the ringgit’s outlook may remain uneven amid fluctuating expectations on global monetary policy, and pledged to preserve confidence in the currency that remains one of Asia’s worst-performers.
Bank Negara Malaysia (BNM) governor Abdul Rasheed Ghaffour said he was mindful that a “persistent and material undervaluation of the ringgit” could have permanent implications on the economy, if not addressed.
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“As the global monetary policy tightening cycle has likely peaked, financial markets expect pressure on the ringgit to abate.
“However, the road ahead may still be bumpy,” he said in the bank’s annual economic and monetary report released today.
Policymakers have taken coordinated measures to shore up the currency, helping it to rebound from a 26-year-low reached last month.
The ringgit succumbed to renewed pressure in the past week as bond traders scaled back their US interest-rate cut forecasts ahead of Wednesday’s Federal Reserve meeting.
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“On and off, we may see changing and differing market expectations regarding the monetary policy trajectory of advanced economies.
“This, in turn, will affect the ringgit,” Rasheed said.
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He said the central bank is working with the government to increase inflows and allow the currency to better reflect economic fundamentals and prospects.
Subsidy reforms
The ringgit’s weakness has been in large part due to the record differential between Malaysia’s key rate and the upper bound of the Federal Reserve’s benchmark.
The central bank last adjusted the overnight policy rate in May.
“Going forward, any changes to monetary policy will need to carefully assess the effects of Malaysia’s plans to reform subsidies on prices and growth,” Rasheed said.
The central bank said it expects the impact of price pressures from such a move to last for about a year.
“The government will unwind blanket subsidies for the RON95 fuel, Malaysia’s cheapest and most commonly used gasoline, once it has decided on a date,” said economy minister Rafizi Ramli recently.
Malaysians have until the end of March to update their income details in a central database known as Padu, which authorities will then use as a guide to identify those eligible for government programmes, aid, and subsidies.
“Monetary policy response may not be required when relative price adjustments are transitory and likely to normalise over a reasonable period of time,” he said.
Headline inflation has been steady at 1.5% in the three months to January. That is the lowest rate in Southeast Asia after Thailand, where consumer prices have been printing negative since October.
Improving investor sentiment as a result of the government’s spending reforms will also “help reinforce the value of the ringgit and ensure that it appropriately reflects our strong domestic fundamentals,” he added.
Room for optimism
BNM, in its report also trimmed its 2024 headline inflation expectations to range within 2%-3.5%, compared with its earlier forecast of 2.1%-3.6%.
“That range incorporates some potential upside from the implementation of the fuel subsidy rationalisation,” said the report.
BNM maintained its growth projection for the year at between 4% and 5%, citing an improvement in external demand.
“Looking to 2024, there is room for optimism even as the external environment remains highly uncertain.
“Malaysia’s economic fundamentals will allow it to weather storms such as prolonged high interest rates and escalation of geopolitical events,” he said.
The ringgit recouped a loss from earlier today to trade little changed at 4.7380 against the dollar as at 12:16pm.
The currency is undervalued and is set to strengthen to 4.50 towards the end of the year, supported by the prospect of Fed rate cuts and a stronger yuan then, Malayan Banking Bhd head of foreign exchange research Saktiandi Supaat said in an interview with Bloomberg Television.
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