KUALA LUMPUR (Mar 7): As Bank Negara Malaysia (BNM) kept the Overnight Policy Rate (OPR) unchanged at 3% for the fifth time on Thursday, economists expect continuation of the steady benchmark interest rate to help narrow the negative gap with US rates, and in turn, support a further recovery in the ringgit by the second half of the year.
This is in addition to ongoing and coordinated efforts by the government and BNM to enhance foreign exchange conversion as the year proceeds, said UOB Global Economics & Markets Research.
UOB was referring to BNM's statement, saying that the government and central bank are taking "coordinated actions to encourage repatriation and conversion of foreign investment income" by government-linked companies (GLCs) and government-linked investment companies (GLICs). These actions, according to BNM, are contributing to greater inflows, lending support to a firmer ringgit.
"Other key drivers of ringgit appreciation include an anticipated broad US dollar weakness starting in 2Q2024 that likely comes ahead of the first [US Federal Reserve] rate cut in June, and gradual stabilisation in China’s economy towards the end of the year," UOB wrote in a macro note on Thursday.
Earlier in the day, after its second Monetary Policy Committee (MPC) meeting of the year, BNM announced that the OPR would remain unchanged at 3%, a decision that was widely expected and was correctly predicted by 19 economists surveyed by Bloomberg.
Maintaining the sentiment expressed in January, the central bank said the current OPR level remains supportive of the economy and is consistent with its assessment of inflation and growth prospects.
The MPC has maintained the OPR at 3% since its July 2023 meeting. The headline rate was last raised by 25 basis points in May 2023.
Following the announcement, economists maintained their initial projection that the OPR will be kept intact at 3% for the rest of the year.
They also noted BNM's continued neutral tone on both growth and inflation. Comparing the latest and previous OPR statement from the central bank, BNM has kept its assessment of continued global growth albeit moderately, with improvement in regional economies as global tech upcycle gains momentum, despite modest China growth.
According to HSBC Global Research, there is little reason to sound hawkish, as growth is still at a nascent stage of recovery and inflation remains largely benign.
While GDP is expected to grow further in 2024, HSBC pointed out that Malaysia has seen a delayed recovery in the trade cycle, as the gross domestic product (GDP) in 4Q2023 evidently indicated a major drag from external weakness.
"Even with a delayed recovery, we expect the trade upturn will mainly accelerate Malaysia’s growth, likely from 3.7% in 2023 to 4.5% in 2024. The cautious optimism on growth prospects have been consistently stressed by BNM," it added.
However, economists highlighted the shift in tone with regards to BNM's assessment of the ringgit. Maybank Investment Bank's economics research team said BNM has “upped the ante” by shifting the narrative from “ringgit weakness vs US dollar being due to external factors rather than current domestic economic performance and outlook" to stating outright that the “ringgit is undervalued vs economic fundamentals and growth prospects”.
"Our FX Research maintains the house view of ringgit ending this year firmer vs USD at 4.40. Within the next 6-9 months, ringgit-positive factors include the signs of improving economic growth prospects, as per the exports rebound in January 2024 of +8.2% year-on-year after 10 straight months of decline (Dec 2023: -10.1%)," Maybank said.
Similarly, MIDF Research also believes that the ringgit is in a good position to strengthen, supported by an upbeat domestic economy and the country being a net commodity exporter of oil and gas and palm oil.
"Ringgit stands to gain from the supportive global commodity prices and sustained trade surplus. Most importantly, the [US Federal Reserve] and other major central banks have shifted its monetary stance from hawkish towards dovish, and thus interest differentials would narrow in 2024. We expect USDMYR to average at RM4.38 and reach RM4.20 by year-end 2024," MIDF said.
The next MPC meeting is scheduled to be held on May 8 and 9.