- The January inflation figures, together with weaker real GDP growth, show that Bank Negara Malaysia will likely continue keeping the overnight policy interest rate stable at 3.00%
- Policymakers have stepped up their rhetoric to contain the fall of local currency. The policy statements had a positive effect on the ringgit.
- The interest rate gap to the Fed Funds rate of 250 basis points is prompting foreign investors to withdraw capital from the domestic market.
- If the Monetary Policy Committee leaves the rate unchanged, the USDMYR might decline to the critical support level of 4.6000–4.6200 in the short term.
KUALA LUMPUR, MALAYSIA - Media OutReach Newswire - 6 March 2024 - The Monetary Policy Committee of the Bank Negara Malaysia (BNM) will meet on 6 – 7 March to decide on monetary policy. BNM is expected to keep the interest rate unchanged at 3.00%.
In recent months, the overall inflation rate in Malaysia has been slowing down. According to the latest monthly highlights and statistics, headline inflation was 1.5% year-on-year (YoY) in January 2024. Thus, the January inflation figures, together with weaker real GDP growth in the fourth quarter of 2023 (4Q23) and continued currency weakness, reinforce the view that Bank Negara Malaysia (BNM) will continue keeping the overnight policy interest rate (OPR) stable at 3.00% through 2024 and lean towards a 25 basis points rate cut a year from now.
Although inflation has declined significantly, it would be premature for Malaysia to declare victory over high inflation. Several internal and external factors could derail the decline in inflationary pressures. These include geopolitical tensions, high interest rate differentials, and currency depreciation. The last factor on the eve of the Monetary Policy Committee meeting is the most relevant.
Policymakers have stepped up their rhetoric to contain the local currency's fall after last week when it hit its weakest level since the height of the 1998 Asian financial crisis. A key message from the government is a willingness to sell dollars from its reserves to limit the ringgit's interchangeable weakness.
Bank Negara Malaysia is prepared to sell U.S. dollars from its reserves to ‘restrict excessive weakness in the ringgit’, the nation's second finance minister, Datuk Seri Amir Hamzah Azizan, said.
The policy statements had a positive effect. The Malaysian ringgit gained strength against the U.S. dollar at the beginning of the trading week—USDMYR is trading below the 4.8000 level, which was identified in the rhetoric as a critical benchmark for the central bank to start currency interventions.
Also, Bank Negara Malaysia has kept its key rate at 3.00% since July, making it a record low relative to the Fed funds rate. The 250 basis point interest rate gap prompts foreign investors to withdraw capital from the domestic market, thereby adding pressure on the ringgit. Nevertheless, investors are optimistic about the further development of the situation, as starting from the second half of the year, the prospect of a rate cut in the U.S. Federal Reserve strengthens. This factor will support the ringgit—USDMYR may recover to 4.5000 by the end of the year.
Thus, the chances of rate savings are high. Investors should pay attention to the accompanying rhetoric regarding government support and the size of currency interventions to support the national currency. Should there be such statements, the ringgit could strengthen—USDMYR might decline to the critical support level of 4.6000–4.6200 in the short term.
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