PETALING JAYA: The prospect of the Federal Reserve (Fed) delaying interest rate cuts as inflation starts ticking up again in the US is bad news for Malaysia as it could further pressure the ringgit, say economists.
Policymakers at the US central bank want to see inflation “start falling” towards 2% before initiating rate cuts. However, its inflation rate as measured by the consumer price index (CPI) rose to 3.5% in March, significantly higher than February’s 3.2%.
Center for Market Education (CME) CEO Carmelo Ferlito said a delay in the Fed cutting rates means “pressure on the ringgit will persist”, and will dampen domestic spending.
It will also mean the outflow of capital will continue, attracted by higher returns in the US, he added.
A key reason why the ringgit has weakened against the greenback over the past year-and-a-half is the significant differential between Malaysia’s overnight policy rate (OPR) at 3% and the Fed fund rates at 5.5%, at the upper band. This has prompted an outflow of funds from Malaysia to the US and other markets with similar high interest rate differentials.
At its monthly meeting on Wednesday, the Fed held its fund rate steady. Fed chairman Jerome Powell told reporters inflation was “too high and progress in bringing it down was uncertain”.
After pricing in as many as six rate cuts for 2024 earlier this year, markets are now pricing in only one, in December, according to Reuters.
Ferlito emphasised the need to differentiate between speculative investors seeking higher returns, and strategic investors who are attracted by the general ecosystem, and not just by one factor such as the interest rate.
He also noted that the government cannot control the external factors at the root of the ringgit’s weakness. Nevertheless, he said the government can speed up the implementation of structural reforms which are pro-market and pro-business, as advocated by Bank Negara Malaysia (BNM) governor Abdul Rasheed Ghaffour.
The governor recently reiterated the need for structural reforms critical to strengthening the country’s growth prospects and encouraging investments, in order to provide more “enduring support for the ringgit”.
Fed’s dilemma, BNM’s response
Meanwhile, economist Shankaran Nambiar said the Fed faces a dilemma with slowing growth rates and rising inflation, potentially causing rate cuts to be delayed.
“The Malaysian authorities were banking on the Fed cutting its rates to lower the differential between rates in the US and Malaysia.
“If this does not happen, the authorities will have to use non-rate measures (to strengthen the ringgit), and that is precisely what they are doing,” the Malaysian Institute of Economic Research senior research fellow told FMT Business.
The measures taken by BNM and the government include “encouraging” government-linked companies (GLCs) to repatriate earnings from foreign investments and prioritising domestic investment.
“The GLCs will heed the advice that was given and this might hold out for a while, but the moot question is how long we will have to wait.
“If the tide doesn’t turn, I expect the authorities will go deeper down the path of encouraging and persuading companies (GLCs) to delay investment overseas, delay buying foreign equipment, and converting non-ringgit profits to ringgit assets,” Nambiar said.
On the implications of the Fed’s rate decision on market sentiment and investor behaviour in Malaysia, he said the short-term sentiment might not work in Malaysia’s favour.
“I think authorities will lean more heavily to make sure the ringgit does not lose too much ground. This may be necessary to make sure the psychology of a weakening ringgit is kept at bay,” he added. - FMT
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