Finance

Malaysia's Central Bank to Maintain Key Rate Amid Currency Turmoil

In a recent assertion, Malaysia's central bank is poised to maintain its benchmark interest rate at a heightened level it has not seen for half a decade come Thursday, in a strategic effort to provide what limited policy support it can to fortify the nation's currency, which has recently plummeted to a 26-year nadir.

Interest Rates Held Steady to Cushion the Ringgit

Bank Negara Malaysia (BNM) is resolved to keep the overnight policy rate steady at 3% at its forthcoming meeting, echoing the unanimous forecast by all 19 economists surveyed by Bloomberg. The central bank's last rate adjustment occurred in May 2023, marking a modest increase of 25 basis points.

The regional currency, the ringgit, is currently trailing as one of the weakest among its peers in emerging Asia. One significant factor contributing to this performance is Malaysia's comparatively lower interest rate against other countries. Second Finance Minister, Amir Hamzah Azizan, addressed this concern in parliament last week, highlighting that the policy rate sits at a record low when compared to the upper threshold of the Federal Reserve's interest rates.

Despite pressures to bolster the ringgit through rate hikes, Amir Hamzah Azizan advised caution, emphasizing the policy rate's primary function as an instrument for ensuring price stability and fostering sustainable economic growth rather than as a means to strengthen the currency.

Stagnant Growth and Inflation Concerns

BNM's hesitation to adjust the policy rate may be well-founded, given the tenuous state of the Southeast Asian economy, which fell short of growth expectations in the previous year during China's fraught recovery process. This has led analysts to retrench their economic forecasts for Malaysia in 2024. Complicating matters further, the potential for inflationary pressures looms large due to the country's impending reassessment of its price controls and subsidies. In light of these challenges, BNM is to promulgate its growth and inflation projections on March 20.

The Ringgit’s Battle and Central Bank Strategy

In response to the ringgit's devaluation last month to its lowest since the Asian financial crisis of 1998, the policymakers have fortified their verbal defense of the currency. BNM may reassert the view that the ringgit is trading below its true value and enumerate the steps taken to support it.

The recent uptick in the ringgit to a one-month high on Monday is a testament to the efficacy of these efforts, as policymakers intensify collaboration with state-affiliated corporations to bolster the currency.

“BNM will maintain a balanced tone as policymakers strive to navigate the risks,” as stated by Lloyd Chan, a currency analyst at MUFG Bank Ltd. Chan suggests that policymakers are striving for a delicate balance, eschewing an overly hawkish stance, which could aggravate growth concerns, while avoiding any dovish signals that could further undermine the ringgit.

Notably, in January, the monetary policy committee deviated from its usual practice by remarking on the currency's performance, attributing the recent fluctuations mainly to external influences.

A Closer Look at Malaysia’s Growth Prospects

It is anticipated that BNM will reinforce its 2024 growth projections, banking on improvements in exportation and robust internal spending. January's export figures, which surpassed expectations and ended a 10-month streak of reductions, suggest that Malaysia, an economy reliant on trade, may soon turn the corner.

However, BNM must contend with potential downside risks. Concerns about weaker-than-expected external demand remain, particularly in light of China's inconsistent growth trajectory.

Bloomberg Economics weighs in, predicting that BNM will hold its overnight policy rate at 3% during the March 7 meeting. They note that inflation has reverted to levels presumably preferred by the central bank, and the overall pricing outlook looks relatively tame, especially given the anticipated slowdown in the economy's growth engines this year.

For further insights from Bloomberg Economics, readers can find the full analytical note here.

Assessing Inflation Risks in Malaysia

Malaysian inflation has hovered at 1.5% for three consecutive months; however, BNM has repeatedly warned of potential price threats stemming from the government's subsidy reform plans for the current year.

Additional factors posing a risk to price stability include the possibility of global supply chain disruptions triggered by geopolitical unrest in the Red Sea region, as Shahira Rahim, an analyst at BIMB Securities Sdn., has indicated. Moreover, as of March 1, the country has seen an uptick in its services tax, with businesses passing on the increased costs of imported materials to consumers.

The combination of increased service taxes and the rationalization of subsidies might lead to a rise in the cost of living, as observed by Firdaos Rosli, chief economist at AmBank M Bhd. According to Rosli, it is anticipated that inflation will inch upwards, possibly becoming more pronounced in the face of the government's fiscal adjustments.

The assistance in compiling this financial overview was provided by Karl Lester M. Yap.

Final Note

It's important to recognize that the central bank's decision-making process is a delicate endeavor that involves balancing various economic indicators and predictions. With the potential changes to Malaysia's pricing structure and external threats, BNM will need to tread carefully to ensure that its policy decisions align with both immediate financial stability requirements and the long-term growth prospects for the country.

This article reflects information as represented in 2024 by Bloomberg L.P. and is intended to be a comprehensive analysis of the challenges and strategic considerations currently facing Bank Negara Malaysia in its effort to navigate a complex economic environment.