Ringgit shows positive reaction on hawkish BNM stance

The central bank’s decision to maintain or adjust the OPR is expected by Jan 25 next year


The ringgit reacted positively to the news that Bank Negara Malaysia (BNM) will likely raise the Overnight Policy Rate (OPR) in January next year, as the direction also signals a stronger economic turn for the country.

Analysts said the Malaysian currency’s performance and how well it is supported throughout 2018 would depend much on the adjustments implemented by the central bank, as well as any additional interest-rate hikes that could be expected.

The ringgit stood at RM4.1935 against the greenback last Friday, the highest since Sept 20 this year and gaining 0.8% over the course of two trading days.

This follows the Monetary Policy Committee (MPC) maintaining the OPR at 3% last Thursday, but stating that it may review the current degree of monetary accommodation in Malaysia in light of the bullish outlook on the country’s economic growth.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said MPC’s statement had changed the course of the ringgit, as BNM is likely to review the prevailing OPR.

“Such news is ringgit-positive — especially when some other economies such as Indonesia and India have taken a different path in terms of an interest-rate decision.

“This could perhaps make the ringgit stand out in relative terms,” Mohd Afzanizam told The Malaysian Reserve (TMR) in an emailed reply.

He said it is now a matter of timing and the quantum of the adjustment, as BNM will have to find a middle point between the need to raise interest rates and managing public perception, given the rising cost of living.

“There could be a misconception among the general public, however, raising the rate at a time when the economic growth is strong is necessary to avoid asset price bubbles or risk of financial imbalances,” he added.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the ringgit is expected to continue to appreciate this year and into early 2018, supported by both an interest-rate differential perspective and a stronger domestic growth narrative.

“If Malaysia’s economic performance continues to overshoot expectations, look for markets to price in one additional hike in 2018 which will offer even more support to the ringgit,” Innes told TMR.

While analysts are generally positive on the economic outlook of the country due to favourable macro conditions and the rising oil prices, the US policy changes will still continue to hold sway over the ringgit’s performance.

“On the US dollar side of the equation, the Republican Party’s internal squabbles over tax reform will continue to hang like an anvil around the dollar’s neck in the near term and should play favourably for regional currencies,” he said.

ForexTime Ltd global head of currency strategy and market research Jameel Ahmad said the performance of the ringgit remains a “dollar-story”, despite the possibility of BNM hiking interest rates next year.

“We are seeing some gradual weakness in the US dollar due to emerging concerns that the plan to cut corporate taxes in the US could be delayed until 2019.

“This has weighed on the US dollar and is likely the catalyst behind currencies edging higher against the greenback, including the ringgit,” Jameel told TMR.

He said US President Donald Trump coming up with further obstacles in implementing his pre-election pledges could prompt further selling momentum for the US dollar.

In the meantime, BNM’s decision to maintain or adjust the OPR is expected by Jan 25 next year.