MNI INSIGHT: Stable Ringgit Key As Malaysia CenBank Tightens

Malaysia’s central bank sees the stability of the ringgit as justification for its recent rate hikes and is prepared to continue to tighten policy at its next meeting in September, MNI understands.

Bank Negara Malaysia has hiked rates at its last two meetings and its Overnight Policy Rate is now at 2.25%, with the bank the first of the Southeast Asian central banks to raise rates, (See: MNI STATE OF PLAY: Malaysian CB Hikes As Economy Strengthens.)

Another 25 basis point increase is likely in September and the central bank may not stop there, MNI understands.

(See: MNI INSIGHT: Rates Outlook Turning Hawkish in Thailand).
(See: MNI INSIGHT: Indonesia CenBank Sees A Window To Drive Recovery).

DATA AHEAD OF THE CURVE

Key Malaysian economic data, such as the strong 5.0% first quarter GDP growth and moderate 2.8% inflation in May, are not demanding immediate rate hikes. But BNM has been keen to move ahead of the curve and normalise its pandemic period policies while also supporting the currency and pre-empting the momentum for inflation.

Inflation is comparatively modest at 2.8% and government subsidies are keeping a lid on fuel prices although food prices surged 5.2% in May, the biggest rise in more than a decade. BNM has a 2% to 3% target for inflation.

RINGGIT IN FOCUS

The currency, meanwhile, has weakened against the USD over the last month but only marginally, down from MRY4.40 to MYR4.45, and has held its own against regional currencies. The ringgit began the year at MYR4.18 against the USD.

BNM is aware that foreign investors could exit their Malaysian investments as emerging markets lose their appeal partly due to weaker currencies. The central bank has noted that foreign investors have traded out of Malaysian equities and corporate bonds in recent months.

The central bank’s priority is to steer the Malaysian economy back to post-pandemic normality and protect the economic recovery. In doing this, the stability of the currency is seen as critical. MNI understands this now outweighs any dampening of consumer or local business sentiment which higher rates may bring.