Interest rates unchanged

Bank Negara says risk to financial system contained as ringgit falls to lowest levels since 1998 crisis

PETALING JAYA: As widely expected, Bank Negara has kept the overnight policy rate (OPR) unchanged at 3% in the face of a weakening ringgit, as the local currency fell for the seventh consecutive day.

The ringgit fell 0.53% to close at 4.4445 against the US dollar, the weakest level seen for the Malaysian currency since the 1997/98 Asian Financial Crisis.

In justifying its move to maintain the benchmark interest rate at current levels, the central bank said the risk of financial imbalances being destabilised had been contained, while the monetary policy’s ‘accommodativeness’ remained supportive of Malaysia’s economic growth.

“At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy,” Bank Negara said in a statement released yesterday after the final Monetary Policy Committee (MPC) meeting for 2016.

“The risk of destabilising financial imbalances has been contained. However, the MPC will be monitoring these risks to ensure the sustainability of the overall growth prospects,” it added. Research houses, meanwhile, felt that the current volatility and slow economic environment left Bank Negara with little option but to leave the rates unchanged.

“The current weakness of the ringgit caused by a continuous fund outflow is unlikely to reverse for the time being, making it difficult for the ringgit to experience a sharp rebound in the short term. Foreign investors currently have a huge appetite for the United States stock market; as such a cut in the OPR could cause further fund outflows rather than an inflow.

“Additionally, the almost certain probability of the US Federal Reserve rate hike in the December meeting, as well as elevated inflation expectations in the US, have put pressure on the ringgit,” it explained.

Bank Negara last adjusted the OPR in July, with a cut of 25 basis points to 3% from 3.25% on the weakening economic outlook.

The next MPC meeting will be held on Jan 18-19 next year.

According to RAM Rating Services Bhd, the OPR would likely continue to hold at 3% throughout 2017, as the ringgit’s value is expected to remain volatile, while the country’s economic growth would likely remain steady. “Given the expectation of stabilising growth momentum, elevated inflationary pressures and the continued volatility of the US dollar-to-ringgit exchange rate, we opine that Bank Negara will hold the OPR steady at 3%, barring any significant downside risks arising from the deteriorating external conditions,” the credit rating agency said in its 2017 Economic Outlook report.

Similarly, RHB Research Institute said there was limited room for Bank Negara to further ease its monetary policy.

“Given rising currency volatility associated with Donald Trump’s victory in the US presidential election, we believe there is a strong likelihood the central bank will be cautious and keep the interest rate unchanged at the current level of 3.00% in 2017.

“Having said that, there is room for further rate cuts should growth fall below expectations in 2017 and the ringgit stabilises at a stronger level,” the brokerage said.

MIDF Research also will not rule out a rate cut by Bank Negara next year, but not a rate hike.

“We are maintaining our view that Bank Negara will cut its interest rate by 25 basis points in 2017 on two conditions: one, there is no improvement in the quarterly growth momentum of the gross domestic product (GDP), and two, there is a stability in the ringgit movement,” the brokerage said in its report.

“Looking into the market behaviour, it is very unlikely that increasing the interest rate could lead to a fund inflow into Malaysia’s capital market. In fact, a combination of the weakening ringgit and a higher interest rate could hurt the economy, which we think would be very unlikely for Bank Negara to conduct such a move,” it explained.

The steep weakening of the ringgit came after Donald Trump won the US presidential election two weeks ago.

The selling pressure on the currency was exacerbated by Bank Negara’s recent intervention in the foreign exchange (forex) market, which had hurt sentiment; volatility in oil prices; and the recent devaluation of the yuan.

Bank Negara pointed out that the ringgit, along with most emerging-market currencies, had experienced sharp adjustments and significant volatility due to continuing uncertainties in the global economic and policy environment, and geopolitical developments. These factors, it added, could result in periods of volatility in the regional financial and forex markets.

“Heightened financial market volatility in recent weeks has had an adverse effect on various asset classes, exchange rates and yields across many emerging economies. Global financial market conditions are likely to be susceptible to policy and market developments,” Bank Negara said.

To ensure the orderly functioning of the domestic forex market, Bank Negara said it would continue to provide liquidity.

“The capital market remains accessible, deep and liquid. Banking system liquidity is ample,” it said, adding that financial institutions continued to operate with strong capital and liquidity buffers, and the growth of financing to the private sector was consistent with the pace of economic activity.

Overall, Bank Negara said the global economy is expected to continue growing at a moderate pace, while Malaysia’s economy would remain on track to expand as projected in 2016 and 2017, with the private sector being the key driver.

Official forecast has put Malaysia’s GDP growth at 4%-4.5% for this year, and 4%-5% for 2017.

Inflation in the country, on the other hand, is expected to be moderate at around 2%-2.5% this year, and remain stable in 2017, given the environment of low global energy and commodity prices, and generally subdued global inflation.

RAM Ratings in its latest forecast said Malaysia’s GDP growth in 2017 would likely come in at 4.5%, which would be slightly better than its expectations of a 4.2% growth for 2016.

“RAM Ratings expects the economic growth momentum to stabilise in 2017, on the back of resilient domestic demand and improving prospects for external demand, as indicated by the strengthening of the US economy and China’s steadfast structural rebalancing,” it said.

“That said, the prevailing uncertainties vis-à-vis the commencement of Brexit negotiations and the impact that this may have on European businesses, the US’ trade strategy under a new administration and the lingering uncertainties over global oil prices will still pose crucial downside risks to our forecasts for next year,” it explained.
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