Malaysians can heave sigh of relief as US Fed hits pause button

 

Malaysians have suffered from the effects of surging inflation partly contributed by a weakening ringgit following hefty interest rate hikes by the US Federal Reserve over the past year.

PETALING JAYA: The United States Federal Reserve’s (Fed) move to pause its interest rate hike cycle was greeted with a palpable sigh of relief by countries around the world, including Malaysia whose currency has been battered by a US dollar supercharged by US rate hikes.

After 10 straight increases, the US central bank voted to hold its benchmark lending rate steady at between 5% and 5.25%.

“The rest of the world, including Malaysia, can breathe a sigh of relief that there won’t be further shocks to the exchange rate, which has knock on effects on inflation,” Sunway University business school economics professor Yeah Kim Leng told FMT Business.

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“That’s because a further rise in interest rates will contribute to a stronger dollar, and that currency strengthening has already affected the rest of the world.

Year-to-date (ytd), the ringgit is among the worst performing currencies, second only to the Japanese yen. The ringgit has fallen almost 5% versus the US dollar compared with the yen, which has slumped 5.9% against the greenback ytd.

Yeah explained that the US rate hikes had raised inflation in countries whose currency had weakened against the dollar, adding this risk has been temporarily removed for now.

“What it signals is that once the interest rate hike is (finally) over, then the (new) focus on growth will help keep the rest of the world from going into a downward spiral.

“It is also helpful in achieving our growth forecast for the year. With the lower volatility, and capital flowing back to emerging markets, it will help ease constraints and boost the financial markets,” he said.

Dodging the bullet?

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However, there are indications the hefty rate hikes over the past year had harmed the US economy although unemployment and the labour market remain tight currently. In addition, consumer sentiment is also showing signs of weakening.

“The US economy may be able to avert a downturn this year, but there are continuing fears,” Yeah said, adding the US Fed has admitted that within the banking system, some banks remain vulnerable to over exposure to real estate.

Any problems in the US real estate sector will contribute to continued volatility among the banks.

“They are still not out of the woods, but at least from an inflation perspective it looks like it’s under control. With a steady decline (in inflation), we are looking at the terminal rate now,” he added.

Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams concurs the interest rate pause is a good sign for the US and wider global economy because it signals a less hawkish interest rate environment.

He also agreed with Yeah that the interest rate pause shows the US is at or near peak rates.

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“This will ease pressure on global interest rates and the currency markets,” he told FMT Business.

However, he does not believe Malaysians should let their guard down. He noted the signals of financial sector weakness are worrying because this can spill over into the wider economy.

“It can cut access to credit as well as increase risk which will worry investors and financial markets, if it is not handled properly,” Williams said, adding that the Fed’s hawkish monetary policy to tame inflation may have been overdone.

While the pause was generally expected, markets were caught off guard by the Fed changing its guidance higher to 50 basis points, implying two more hikes in the coming months. The move was perceived to be a more hawkish stance by the Fed, indicating the threat of inflation has not been eradicated yet.

Pacific Research Center of Malaysia principal adviser Oh Ei Sun opined that the US may see another round of domestic crisis that could sweep away a number of stressed financial institutions and businesses, sparking a global financial crisis.

If that happens, he fears Malaysia – being a largely open economy – could be dragged into a whirlpool again.

“Given the weak ringgit and uninspiring recent economic performance, we hope that Malaysia can weather [the coming] financial and economic storm relatively intact,” Oh added. - FMT