Ringgit tailwinds

THURSDAY’S announcement by Bank Negara that policymakers may consider reviewing the current degree of monetary accommodation gave a boost to the ringgit, which climbed to a near twomonth high against the US dollar.

The wording of the monetary policy statement is good reason to believe that the central bank will start to raise the benchmark overnight policy rate (OPR) as early as January when policymakers next meet.

The expectation of a rate hike, possibly even two rate hikes next year, has had an electrifying effect on the ringgit. The US dollar’s weakening trend has accelerated and the strength of the ringgit is now more convincing than before.

Sometime in the next week or two, the ringgit will hit the psychological four to the US dollar level. Should the momentum be maintained, then the old 3.80 peg is even achievable. A currency’s strength is a reflection of the economy’s fundamentals and judging from the Malaysian economy’s performance in the first half, there is reason to believe that growth is sustainable.

Indicators are showing that growth could come in above 6% year-on-year for the third quarter after the 5.6% rise in the first quarter and the 5.8% achieved in the second quarter, building on both exports and domestic economic activity.

Surging exports are not only good for the international reserves of Bank Negara, but will also have a spillover effect on the rest of the economy, particularly for the vast services sector that drives the economy. With stronger fundamentals, investor confidence should rise, which will, in turn, be good for Malaysian assets.

Besides signaling that economic growth is strong and stable enough to absorb higher interest rates, the hike will also narrow the interest rate differentials at a time when major central banks are raising interest rates. The US Federal Reserve’s (Fed) determination to normalise interest rates means that there will be more rate hikes to come, and Bank Negara’s tightening monetary policy stance could help ease pressure on the ringgit.

To put things in perspective, the Fed has raised interest rates twice, the Bank of England once and the European Central Bank has announced that it will cut back on its quantitative easing programme, which will effectively see interest rates rising.

At the ground level, a rise in the OPR will see commercial banks adjusting not just their lending rates but also their deposit rates, which will help ordinary Malaysians somewhat, as their savings have eroded due to high inflation this year, which does not look like abating anytime soon because of higher energy prices.

A strengthening ringgit will also help with consumer sentiment, which has been below the Malaysian Institute of Economic Research’s 100-level threshold, indicating lower confidence since mid-2014. It will also help ease the price pressures from imports.