Malaysian Ringgit Falls As Negara Cuts Interest Rates

Malaysian Ringgit Falls As Negara Cuts Interest Rates
May 8, 2019

 

Yesterday, Malaysia’s central bank, Negara, announced a cut to the prevailing interest rates in approximately three years to assist economic expansion and offset challenges from the global economic slowdown, trade unrest, and commodity price vulnerability. Also, the central bank issued a soft growth outlook. The rate cut has come at a time when central banks from Japan to Europe strive to provide financial assistance to the domestic economy. Following the announcement, the USD/MYR pair rose from a low of 4.1294 to a high of 4.1485 in 24 hours.

The Monetary Policy Committee of Bank Negara chose to trim the overnight policy rate by 25 basis points to 3%. The decision matched the projections of economists. Notably, the central bank announced a rate hike by 25 basis points to 3.25% in January 2018. The latest rate cut was the first since July 2016. The decision was made on the grounds of slowing growth as China-US trade conflicts weighed on the economy.

Commenting on the rate cut, the central bank said “While domestic monetary and financial conditions remain supportive of economic growth, there are some signs of tightening of financial conditions. The adjustment to the OPR is therefore intended to preserve the degree of monetary accommodativeness.”

Recent information indicates mild financial activity in 1Q19. Looking forward, declining global demand and muted growth of major business partners will continue to soften the domestic industry. Malaysia exhibits clues of being influenced by the lengthy trade conflict between Beijing and Washington, while the international economy reveals hints of softness. Malaysia’s exports decreased by 0.5% in March on a y-o-y basis due to a decline in the shipment of electronics and commodities. The conflict between the world’s top two economies has resulted in levying duties on products worth billions of dollars. Presidential Donald Trump’s threat on Sunday to double import duty on Chinese goods has cast a shadow on an amicable resolution in the near future.

On the issues faced by the global economy, the bank said: “considerable downside risks to global growth remain, stemming from unresolved trade tensions and prolonged country-specific weaknesses in the major economies. Heightened policy uncertainties could lead to sharp financial market adjustments.”

In the meantime, a steady employment market environment and main sector capability expansion are anticipated to continue pushing family and capital expenditure.

Regarding the current domestic scenario, Malaysia’s central bank stated that while “monetary and financial conditions remain supportive of economic growth, there are some signs of tightening of financial conditions.”

During fiscal 2018, the GDP growth of Malaysia dipped to 4.7%, from 5.9% in the earlier year. Not surprisingly, the Malaysian stock market was one of the worst performing markets in 2019. The central bank has forecast the Malaysian economy to expand between 4.3% and 4.8% this year.

Regarding global economic uncertainty, the bank said: “However, there are downside risks to growth from heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.”

Inflation is forecast to remain broadly stable this year.

Regarding the interest rate cut, ING economist Prakash Sakpal said: “Today’s rate cut still leaves the central bank with a sufficient interest rate buffer if economic conditions deteriorate further, but this may not be required.”

Sakpal further said, “We expect the timely policy boost together with the favorable base effect to shore up growth in the rest of the year towards the top end of the forecast range.”

Han Tan, a currency strategist at FXTM, said the rate cut should assist in increasing domestic spending and boost the Malaysian economy.

Han Tan said, “External headwinds and ongoing concerns around the impending slowdown for the global economy are the primary reason behind why several central banks across the world are expected to change their monetary policy outlook this year.”

Bank Negara’s choice to slash interest rates could further bring down the value of ringgit, and the government should track national currency carefully, tells MCA chairman Datuk Seri Dr Wee Ka Siong. He pointed out that yesterday’s trimming of the Overnight Policy Rate (OPR) to 3.00% narrowed the interest rate differentials between Malaysia and US where interest rates range from 2.25% to 2.5%, after consistently raising US benchmark rates in 2018.

In a Facebook post, Datuk Seri Dr Wee Ka Siong said: “Therefore, more foreign funds may decide to sell Malaysian bonds and withdraw money from Malaysia to invest in the United States or other countries.”

If this occurs, Dr. Wee said the ringgit could crash further against the greenback, particularly if the US hikes its interest rates again in 2019.

Dr. Wee further said, “I hope the Government will monitor and control the ringgit so that the depreciation since GE14 will not deteriorate further.”  

The Ayer Hitam MP also said that the decision to reduce the interest rate showed that the economy has become sluggish.

Hitam pointed out issues that the currency could face: “Although such a move can help the economy, it also puts pressure on the ringgit.”

The rate cut and overall bearish sentiment is expected to keep the stock bearish in the short-term.

The historical price chart indicates that the USD/MYR currency pair has formed a rounded bottom as shown in the image below. As a result, we can expect the currency pair to rally and reach the level D in the next few days.

Myr - technical analysis - 8th May 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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