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Policy normalisation can lend support to ringgit

THE STAR – In an environment of rising global interest rates, an increase in the overnight policy rate (OPR) could help mitigate the risk of capital outflows and pressure on the local currency.

The ringgit is currently hovering at 4.18 to 4.19 against the United States (US) dollar, implying a loss of 0.54 per cent year-to-date (ytd).

According to the Malaysian Rating Corp Bhd (MARC), although a hike in the OPR could cause some economic pain, the move may be necessary to reduce risk in the country’s financial system and support the ringgit.

The credit rating agency opines that Bank Negara could wait until the second half of this year before raising the benchmark interest rate by 25 basis points (bps) to two per cent from the current record low of 1.75 per cent.

“Suppose Bank Negara decides to remain on the sidelines and keep its accommodative monetary policy to avoid hurting the economy further. In this case, it risks inflation feeding into expectations, wage and price-setting, consequently setting off economic instability.

“On top of that, it also risks more capital outflows and a weaker ringgit amid rising global interest rates due to normalising global monetary policy,” the rating agency said in its recent report.

The combination of the United States Federal Reserve’s (Fed) tapering of asset purchases and possible interest rate hike as early as March is expected to put pressure on emerging-market currencies, including the ringgit.

Analysts expect the Fed to undertake three to four interest-rate increases of 25bps each this year.

A rise in United States (US) interest rates would mean higher Treasury yields, which attract capital flows in the US away from emerging markets. This could lead to a stronger US dollar and weaker emerging-market currencies.

Wells Fargo Securities said over the week it expected emerging-market currencies to come under the most pressure in 2022-2023 as tighter Fed policy, higher bond yields and local political developments result in weaker currencies across the emerging markets spectrum.

In its note to clients, the US-based brokerage said it expects to flock to the US dollar just as underlying risks in developing economies come into focus.

“The dynamics that have supported foreign currencies, in particular emerging-market currencies, are unlikely to persist,” it said.

“As the focus shifts back to country-specific fundamentals, we believe investors will again divert capital back toward US dollar-denominated assets, which should be supportive of the greenback over time,” it added.

Bank Negara kept the OPR at 1.75 per cent in its first Monetary Policy Committee (MPC) meeting for 2022 over the week. It said risks to the growth outlook remained tilted to the downside.

The next MPC meeting is scheduled for March 2-3.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid maintained his view that the central bank will raise the OPR by 25bps in the second half of 2022. This, he said, should lend support to the ringgit.