Ringgit bulls watch central bank support as neighbours hike rates
INVESTORS in the Malaysian ringgit are hoping the nation’s central bank will step in to support the currency as it lingers near the weakest level since 1998.
That’s put Bank Negara Malaysia’s (BNM) policy decision on Thursday (Nov 2) in focus, especially after authorities in Indonesia and the Philippines recently raised interest rates to back their currencies. While Bloomberg Economics expects no change in BNM’s policy rate, some analysts see the central bank announcing other measures to boost the ringgit.
There may be some “jawboning to suggest that the BNM is watchful of the ringgit moves veering too far from fundamentals and in a speculative manner”, said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. BNM may also impose some temporary limits on FX positioning, and inducements for parking forex deposits and inward investments, he said.
The Malaysian ringgit has fallen nearly 8 per cent against the US dollar this year. The BNM held its key rate at 3 per cent since July, putting it at a record discount relative to the upper bound of the Fed Funds rate, which has made it less attractive for US dollar-based investors to buy ringgit-denominated assets.
For Malaysia “a number of factors favour a hold, including inflation that’s back near the long-term average”, according to Tamara Henderson, South-east Asia economist at Bloomberg Economics. “A hike would unlikely turn ringgit sentiment around. It would, though, add to growth headwinds from tighter fiscal policy and weaker global demand.”
Still, with the ringgit near an all-time low, a rate hike cannot be ruled out, Henderson said. Malaysia’s currency fell to 4.7958 per US dollar last week, the weakest in more than 25 years. A breach of the 1998 low of 4.8850 per dollar would take it to the lowest level on record. It closed at 4.7782 on Friday.
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United Overseas Bank said in a note that another 25-basis-point rate hike will not be sufficient to close the interest-rate gap with the US and spur confidence in the ringgit, with the current policy differential at 250 basis points.
Exports drag
The South-east Asian nation’s currency also faces headwinds from a slowdown in China, its largest trading partner, as it posted seven straight months of decline in exports till September.
BNM has already been keeping liquidity tight by selling bills to support the currency and the nation’s interbank rate has risen to the highest level since February. Malaysia’s central bank remains committed to ensure the ringgit adjusts in an orderly manner and businesses continue to be facilitated, BNM governor Abdul Rasheed Ghaffour said last week.
“BNM may continue to lean on a combination of intervention and window guidance to increase conversion of export proceeds and reduce capital outflows,” to support the ringgit, according to a Bank of America note. The bank sees the ringgit falling to 4.90 per US dollar by year-end. BLOOMBERG
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