KUALA LUMPUR (Nov 2): As the ringgit is expected to consolidate against the US dollar in the near future, economists do not foresee any changes to the overnight policy rate (OPR) in 2024.
The unchanged monetary policy domestically contrasts with the recent hikes in other regional counterparts. The central banks of the Philippines and Indonesia delivered surprise 25 basis point (bps) hikes earlier this month to prop up their currencies as well as stem inflationary pressures.
While the ringgit remains in a dire spot against the US dollar — having fallen 7.29% year to date, Malaysia’s headline inflation has fallen largely under control at 1.9% in September.
Coupled with expectations for Malaysia’s growth momentum to pick up into 2024, RHB Research expects no OPR hikes nor cuts in view of uncertain inflationary outlook amid the government’s intention to review subsidies and price caps.
The view is also supported by the expectation that the ringgit is likely to begin consolidating against the US dollar by 1Q2024 to RM4.60-4.70.
Similarly, MIDF Research sees the ringgit appreciating in the near term, as soon as the latter half of 4Q2023 to end the year at RM4.30. It expects recent safe-haven demand for the US dollar to subside and risk appetite to improve.
“Fundamentally, ringgit is in a good position to strengthen as the domestic economy stays on upbeat momentum and as a net commodity exporter (of petroleum, liquefied natural gas and palm oil), ringgit stands to gain from the elevated global commodity prices and sustained trade surplus,” MIDF said in a Nov 2 note.
“From a medium-term perspective, the setting of monetary policy will be able to avert risks that could destabilise the future economic outlook such as persistently high inflation and a further rise in household indebtedness,” it added.
Largely driven by the purchase of residential properties facilitated by homeownership incentives as well as the purchase of motor vehicles following the extension of the sales tax exemption, household debt grew at a moderate 5.1% year on year to RM1.48 trillion as at June 2023 — translating into a debt-to-GDP ratio of 81.9%.
'OPR not a tool to address ringgit weakness'
UOB Global Economics & Markets Research does not see ringgit weakness as a catalyst for BNM to raise rates. Also, based on the current growth and inflation outlook, there are no compelling reasons for the OPR to be adjusted either up or down going into 2024.
“The external environment remains uncertain with more downside risks, which counter a more restrictive monetary policy stance,” it noted.
Bank Muamalat chief economist Dr Mohd Afzanizam Abdul Rashid stressed that the OPR should be used to manage economic growth and inflation, not to address the local currency’s current weakness against the greenback.
“If you raise the OPR simply to appreciate the currency (ringgit), it might backfire since it is a blunt policy tool which affects everyone in the economy,” he told The Edge.
He also questioned the effectiveness of using the OPR to address the ringgit’s weakness against the US dollar, suggesting that while a rate hike may result in a momentary appreciation, the currency may later weaken again.
“We need to be mindful of our policy objectives and what we want to achieve,” he added.
There is currently a 250 bps-wide gulf between the OPR at 3% and US Federal Funds Rate upper limit of 5.5%.
The Federal Reserve signalled a dovish pivot on Thursday as it held its Funds Rate at a lower bound 5.25-5.5%. However, its chairman Jerome Powell left the door open to another increase, citing that Washington has yet to meet its inflation target of sub-2%.
When contacted by The Edge, Socio-Economic Research Centre executive director Lee Heng Guie highlighted that the US economy has shown to be very resilient despite its prolonged high interest rate environment. He thinks that there may be a lagged impact on its economy which may be visible as early as 4Q2023, continuing into the first half of 2024.
Interest rate disparity weighs, but less so with Fed’s rate pause
While the substantial differential between the Federal Funds Rate and the OPR continues to weigh on the ringgit, the US Fed’s decision to hold status quo on interest rates lessens that downward pressure, according to Sunway University economics professor Yeah Kim Leng.
He noted that an attempt to address the ringgit weakness via the OPR would be highly detrimental to domestic growth, which in turn could accelerate the weakening of the local note.
That said, Yeah warned that a prolonged period of ringgit weakness will hamstring the economy’s structural upgrading as imports of technology and capital goods will be more expensive.
“It could also result in resource misallocation and economic imbalances as export-oriented industries generally tend to benefit from cheap currency and attract more investment compared to import-intensive industries.”
“A weak ringgit will also reduce external purchasing power by making overseas travel, investment, education and various other services more expensive for Malaysian individuals and firms. It may also deter foreign investors as profit repatriation from their operations in Malaysia will be smaller when converted into their home currencies,” he added.