BNM unlikely to hike OPR to strengthen the ringgit

 

BNM governor and MPC chairman Abdul Rasheed Ghaffour is unlikely to use monetary policy measures to strengthen the ringgit, say economists. (Bernama pic)

PETALING JAYA: Bank Negara Malaysia (BNM) is expected to prioritise supporting economic growth rather than protecting the ringgit by keeping the overnight policy rate (OPR) steady at 3% when it concludes its two-day Monetary Policy Committee (MPC) meeting today.

The central bank has maintained the benchmark OPR at 3% since July last year. Economists are not anticipating any surprises from the MPC and expect it to maintain the pause on the OPR when it releases its statement this afternoon.

Given that the ringgit recently plummeted to RM4.80 to the US dollar, its lowest level since the Asian financial crisis in 1998, there has been speculation BNM may be forced to hike the OPR to strengthen the beleaguered ringgit.

Benedict Weeraseena, research director at Bait Al Amanah, acknowledged the continuous decline of the ringgit to a new all-time low could be seen as a factor pressuring BNM to raise the OPR.

“However, there is no guarantee raising the OPR will strengthen the value of the ringgit. This is because the main reasons for the ringgit’s weakness are external factors in addition to the long-term loss of Malaysia’s competitiveness.

“Secondly, there is a strong likelihood the US Federal Reserve (Fed) will cut interest rates towards the second half of 2024 as a result of falling inflation and slowing gross domestic product (GDP) growth in the US,” he told FMT Business.

This will narrow the interest rate differential and stem the tide of investors selling ringgit to invest in the substantially higher interest rates in the US, he pointed out.

There is currently a 2.5% differential between the OPR and the Fed funds rate, which has seen a deluge of funds leaving the Malaysian markets for the higher returns in the US.

Weeraseena also said that raising the OPR will lead to “adverse domestic repercussions” including dampening consumption and raising the cost of living especially for individuals and businesses servicing loans, further worsening household debt.

“I think the MPC will keep the OPR steady. At 3%, monetary policy continues to be accommodative and supportive of sustainable economic growth, considering the improving growth momentum and stabilising of core inflation,” he added.

Easing inflationary pressures

Malaysian Institute of Economic Research senior research fellow Shankaran Nambiar said BNM’s overarching priority is to support the country’s economic growth rather than protecting the ringgit via monetary policy measures such as raising the OPR level.

“I doubt it will want to hike the OPR. Inflation has tapered down, employment is looking good, and the central bank is not in competition to match US interest rates.

“As it stands, BNM would want to look at supporting growth. The other thing is that generally, BNM doesn’t try to strengthen the ringgit via raising the OPR,” he told FMT Business.

Nambiar said following reassurances by BNM governor Abdul Rasheed Ghaffour last week, the ringgit has been performing well against other regional currencies. “This takes some of the load off the ringgit.”

The BNM governor said early last week that the ringgit is “undervalued”. He also said BNM has stepped up its engagements with government-linked investment companies (GLICs), government-linked companies (GLCs), corporations and investors to encourage continuous inflows to the foreign exchange market.

Meanwhile, RHB Bank economists opined the MPC will decide to keep the OPR steady at today’s meeting but ruled out the possibility of a rate cut.

“At this juncture, we see limited possibility for BNM to cut the OPR amid the robust economic outlook and the possible upside risks on inflation momentum,” said RHB Bank acting group chief economist Barnabas Gan and economist Chin Yee Sian.

“We expect a rosier economic prospect in 2024, underpinned by improvement in export performance and manufacturing sector activities, in tandem with resilient global and regional economic growth prospects and re-acceleration in the global technology cycle,” they told FMT Business.

On the domestic front, they remained positive on private consumption growth in Malaysia amid healthy labour market demand conditions.

“Fiscal consolidation measures such as adjustments in fuel prices and utility tariffs, as well as the revision in the sales and service tax could inject upside risks on Malaysia’s inflation momentum.

“BNM might hold its benchmark rate until there is greater clarity over the timing and magnitude of fuel subsidy reform, while accessing the lagged impact on overall inflationary trajectory and economic momentum,” they added.

BNM last raised the OPR, from 2.75% to 3%, in May last year, citing the need to “normalise monetary accommodation” in the face of a resilient economy as well as the need to manage persistent inflation.

The central bank had slashed the OPR to 1.75%, its lowest ever, in July 2020 in the aftermath of the Covid-19 pandemic. BNM subsequently hiked the OPR by a cumulative 125 basis points between May 2022 and May 2023. - FMT