Bank Negara Malaysia (BNM) raises interest rate after a long pause: implications for the ringgit
Bank Negara Malaysia's (BNM) Monetary Policy Committee raised the overnight policy rate (OPR) by 25 basis points to 3.00% on 3 May 2023. This move comes after two meetings where rates remained unchanged. The main reasons behind the increase are the continuing high inflationary pressure and the weakened national currency.
The Central Bank also said it wanted to do away with extensive subsidies, which, in addition to being available to all citizens regardless of wealth, had considerable pro-inflationary pressure, straining the state treasury. Nevertheless, the policy change has had an effect. According to 1Q2023 statistics, the domestic demand is growing along with an overall improvement in working conditions.
'The contractionary monetary policy pursued by Bank Negara Malaysia looks justified, given the extensive subsidy program, and suggests a high probability of further rate hikes,' said Kar Yong Ang, the OctaFX financial market analyst.
Following BNM's decision, the ringgit initially gained 0.3% against the USD. However, the positive effect proved short-lived, as two weeks later, the ringgit lost more than 1.0% and is now approaching historic lows. If the downward trend continues, the next target for USDMYR is 4.75, marking a 24-year low not seen since the Asian financial crisis.
According to Kar Yong Ang, 'the continued weakening of the national currency increases inflationary pressures, prompting the regulator to adopt a more rigid position. Nevertheless, achieving rate normalisation will require time, even with additional interest rate hikes and subsidy cuts. Higher global interest rates, a risk-off environment, and sluggish growth of China's economy will further weaken the ringgit in 2Q2023 and early 3Q2023.'
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