Ringgit May Be The Biggest Casualty Of Bnm S Opr Pause

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BNM’s move to leave the OPR unchanged may weaken the local currency against the US dollar and other major currencies. (Bernama pic)PETALING JAYA: Bank Negara Malaysia (BNM)’s decision today to maintain the overnight policy rate (OPR) at 2.75% aims to sustain the economy’s growth momentum but an unintended casualty may well be the ringgit.
Several economists that FMT Business spoke to said BNM’s move to leave the benchmark interest rate unchanged may weaken the local currency against the US dollar and other major currencies.
Bait al-Amanah research director Benedict Weerasena highlighted the downside risks of the central bank’s OPR pause vis-à-vis the ringgit.
“With the US Federal Reserve likely to hike interest rates further, this will widen the interest rate differential and reduce demand for the ringgit as investors favour stronger US bonds.
“This is likely to be exacerbated by other central banks who are aggressively tightening their monetary policies to lower inflationary pressures, which increases the risk of outflow of funds, and jeopardise the ringgit’s performance,” he tells FMT Business.
Weerasena was alluding to US Federal Reserve chairman Jerome Powell’s hawkish comments to the US Congress on Tuesday when he raised the possibility of the US central bank returning to large rate hikes to tackle “sticky inflation”.
Markets are now pricing in an almost 70% chance of a 50-basis point rate hike at the Fed’s March 21-22 policy meeting, according to CME’s FedWatch tool.
The Fed raised the target range for the fed funds rate by 25 basis points (bps) to 4.5%-4.75% in its February 2023 meeting, dialling back the size of previous 75bps hikes for a second straight meeting.
This means that if the Fed opts for a 50bps increase at its next meeting, the fed funds rate will settle at 5%-5.25%, taking the differential with the OPR to 2.25%-2.5%.
Capital flight and imported inflation
In such a scenario, an economic analyst suggested that capital outflow from Malaysia would intensify as hot money would flock to the US to take advantage of the higher returns there.
Investors and international funds may already be pricing this in as the ringgit has fallen some 5.2% against the greenback over the past month.
Bank Muamalat economics and market analysis head Mohd Afzanizam Abdul Rashid notes the US Fed funds rate have always been the main driver of the currency market.
He tells FMT Business that with the Fed now inclined to raise their policy rate further, this will underpin the value of the US dollar and, by extension, weaken the ringgit.
University Malaya economics professor Nazari Ismail concurs that the ringgit was vulnerable in the current scenario.
“The ringgit will depreciate relative to the US dollar if the Fed hikes rates, and the cost of imports will increase, resulting in imported inflation,” he tells FMT Business.
“We are not out of the woods yet as there is still a possibility of inflation rising as consumer demand is still high,” he opined.
Wait-and-see approach
Weerasena said BNM’s “wait-and-see approach” is a good decision to assess the delayed impact of the four OPR hikes totalling 100bps in 2022.
“It is wise for BNM to avoid a monetary policy that would be too restrictive, considering how our domestic economic growth is expected to moderate this year,” he said.
Nevertheless, he thinks there is a strong possibility that BNM will hike the OPR in May by 25bps as part of a gradual and measured move to normalise towards pre-pandemic rates.
MIDF Research economic said the current focus of BNM’s monetary policy setting is to ensure a sustainable growth momentum for the economy.
The research house expects the central bank to restore its monetary bullets to pre-pandemic levels to 3% by H1 2023.
Center for Market Education (CME) CEO Carmelo Ferlito said keeping the OPR unchanged was the right move by BNM in light of the domestic slowdown and still uncertain global scenario.
“It is safe to assume that inflation has moderated despite the real scale of it being shielded by subsidies and price controls. However, it is still too early to say if it will decrease further,” he told FMT Business.
“As lockdown-induced fiscal and monetary expansions have been stronger in the West, it is only natural to see their inflation dynamics be stronger,” he added.
Ferlito said a serious strategy to fight inflationary pressures should include cutting government spending, fighting for balanced budgets, stimulating savings and increasing productivity.
Meanwhile, the Small and Medium Enterprises Association (Samenta) has welcomed BNM’s decision to maintain the OPR at 2.75%.
“We are seeing a gradual normalisation of cost on the ground, which means the inflationary pressures that producers, including SMEs, are experiencing should be subsiding soon,” said Samenta chairman William Ng.
“It is crucial that rates are not hiked at this juncture when many SMEs are just beginning to grow their businesses back to pre-pandemic levels,” he added. - FMT

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