With the ringgit falling to historic lows, the central bank is facing increased pressure to hike the OPR to defend the plunging local currency.
The ringgit weakened to 4.7958 last week against the surging US dollar, the lowest in more than 25 years. It had since climbed slightly to close at 4.7695 yesterday. Year-to-date, it is the worst-performing currency after the Japanese yen, having dropped more than 8% against the dollar.
The situation, however, is not unique to the ringgit. Neighbouring Asean countries recently surprised observers by raising their respective lending rates to support their weakening local currencies.
Indonesia and the Philippines hiked their respective lending rates to 6% and 6.5%. Meanwhile, Thailand raised its key lending rate to 2.25%, the highest level since January 2014.
BNM under pressure
The eight-member MPC headed by BNM governor Abdul Rasheed Ghaffour is stuck between a rock and a hard place.
On the one hand, Rasheed and the MPC have to contend with the reality that neighbouring central banks have resumed monetary tightening to defend their currencies. On the other hand, prime minister and finance minister Anwar Ibrahim has delivered a crystal-clear message to BNM.
Anwar told the Dewan Rakyat on Tuesday there is “no need to raise the OPR” to support the ringgit when economic indicators such as inflation and unemployment have gone down and investment has gone up.
He said the solution to the weakening local currency is to decouple it from the greenback, adding that the ringgit’s dismal performance was also due to the actions of the US Federal Reserve (Fed).
The Fed has raised interest rates 11 times in a year-and-a-half, bringing its federal funds rate to 5.25%-5.5%. With the OPR paused at 3% since July, it stands at a hefty -2.5% differential to the fed funds rate, sparking an outflow of funds to US dollar-denominated assets.
Anwar’s public pronouncement that the OPR should not be raised puts the MPC in an uncomfortable position. Indeed, some observers see the prime minister’s statement, so close to the MPC meeting, as possibly hindering the committee from making an independent decision on the OPR.
Under the Bank Negara Malaysia Act 2009, the central bank has total autonomy to make decisions on monetary policy without interference from the government.
Section 22(2) of the Act explicitly says: “The monetary policy of the bank shall be formulated and implemented autonomously by the bank, without any external influence.”
On whether Anwar’s statement puts pressure on the MPC, Bank Islam chief economist Firdaos Rosli initially declined to comment but subsequently added: “We must uphold central bank independence at all times.”
Nevertheless, he said, there is currently no clear pressure to hike the interest rate apart from the weak ringgit. Hiking the OPR just to defend the ringgit would be detrimental to the local economy’s performance, he said.
“The OPR will likely remain flat, primarily to support output amid moderating growth and low inflation,” Firdaos told FMT Business.
However, Bank Muamalat chief economist Afzanizam Abdul Rashid does not think Anwar’s OPR statement will put undue pressure on the MPC.
“I don’t think so because the MPC is also represented by the external members who will give their independent views on the state of the economy,” he told FMT Business.
Apart from Rasheed, the eight-member MPC comprises three deputy BNM governors, two assistant governors and two external members.
No need to follow the crowd
Afzanizam also said the recent rate hikes by neighbouring countries will not pose a strong pressure on BNM to raise the OPR.
“To some degree, it can drive the sentiments here since Asian regions are also being affected by depreciation of currencies.
“BNM has been quite explicit that they are not targeting any specific level for the ringgit. So, the decisions of other central banks may not affect BNM’s stance,” he said.
Bait Al-Amanah economist Benedict Weerasena said raising the OPR will not do much to support the ringgit given its high yield differential with the US federal funds rate.
“An increase of 25 or even 50 basis points in the OPR would fall short of substantially narrowing the interest rate differential with US rates, and fostering market confidence in the ringgit.
“In other words, the returns on the ringgit will still be much lower than deposits in US dollars, given the current interest rate landscape after the Fed rate hikes,” he said.
He warned that an OPR hike will dampen consumption and raise the cost of living for individuals and businesses.
Weerasena noted that it is important for BNM’s monetary policy to remain accommodative and supportive of economic growth, in light of the slightly slower growth momentum and easing inflationary pressures.
Malaysia Youth Council fellow Adli Amirullah agreed that BNM must prioritise the health of the local economy rather than the ringgit’s performance.
“I think there won’t be any surprises. BNM will hold the OPR steady to ensure that domestic growth goes on rather than strengthening the ringgit,” he said.
OPR likely unchanged
Despite the bleeding ringgit, most economists polled by Reuters on Tuesday shared the view that an OPR hike is unlikely due to Malaysia’s stable domestic inflation and steady growth outlook.
Malaysia recorded an inflation reading of 1.9% in September, the lowest level since March 2021. This gives BNM room to remain accommodative after a modest tightening cycle.
According to the Reuters poll, only two out of 30 economists surveyed from Oct 23 to Oct 30 predicted that the OPR will be raised.
The MPC can probably breathe a sigh of relief given that the Fed’s federal open market committee chose to hold the funds rates steady for the second consecutive meeting, early this morning.
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