Asia’s worst currency slump puts BNM on guard

Bank Negara’s attempt to stop foreign banks from using offshore forwards to bet against the currency exacerbated the decline, as it evoked fears of capital controls imposed during the Asian financial crisis in 1998.

Asia’s worst-performing currency slump since Donald Trump’s surprise US election victory is putting a Malaysian interest-rate cut out of sight for now.

After surprising the market with a reduction in July, economists surveyed by Bloomberg in the days leading up to the US vote had forecast another cut this year. Trump’s win and the ensuing US dollar rally have swept those bets away, with all 19 economists polled in a fresh survey predicting Bank Negara Malaysia (BNM) will hold the overnight policy rate at 3 per cent on Wednesday.

The ringgit has fallen more than 5 per cent since the Nov. 8 US elections, as emerging Asian economies suffered about $11 billion of outflows. Bank Negara’s attempt to stop foreign banks from using offshore forwards to bet against the currency exacerbated the decline, as it evoked fears of capital controls imposed during the Asian financial crisis in 1998.

“Given the currency weakness and also potentially an uptick in inflation next year, the room for deeper rate cuts is slimmer,” said Julia Goh, an economist with United Overseas Bank Ltd. in Kuala Lumpur. “The volatile ringgit and the dollar’s strength complicate matters.”

Former Powerhouse

Once among Southeast Asia’s powerhouses, Malaysia’s economy is faltering with the World Bank forecasting growth of less than 5 per cent from 2016 to 2018. The economy expanded 4.3 per cent last quarter from a year earlier.

The depreciating ringgit in part has prompted analysts at ING Groep NV and Nomura Holdings Inc. to change their forecasts, expecting the central bank to stand pat at its last policy meeting this year, from an earlier projection of a reduction. UOB’s Goh predicts policymakers will resume cutting rates in the first half of 2017.

Other central banks in the region are also holding off from adding stimulus, with Indonesia last week keeping its benchmark rate unchanged after six cuts this year.

The Malaysian currency fell for 10 straight days through Tuesday and was trading at the lowest level since October 2015. Inflation is projected by the government to average between 2 per cent and 3 per cent next year, compared with 2 per cent to 2.5 per cent this year.

“With BNM stepping up rhetoric against speculation on the ringgit, the focus is now firmly on currency stability with growth/inflation dynamics taking a backseat for now,” DBS Group Holdings Ltd. said in a note this week.