KUALA LUMPUR: A steady overnight policy rate (OPR) will be one of the key factors that may strengthen the ringgit against US dollar in the coming months, economists said.
Bank Negara Malaysia has maintained the OPR at 3.0 per cent since May last year and economists expect the status quo at the central bank's fourth Monetary Policy Committee (MPC) meeting of the year on July 11.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said maintaining the OPR's status quo will indeed strengthen the ringgit against the greenback if the US Federal Reserve (US Fed) reduced interest rate.
He added that the policy adjustment, especially on fuel subsidies, are expected to have important implication to the current inflation rate trajectory.
"The current inflation rate projection of 2.0-3.5 per cent for 2024 suggests a high degree of uncertainties on the future prospects for inflation. At the same time, the US Fed may reduce its benchmark interest rate as early as September based on market expectations.
"If the rate cut really happens, it would boost the value of the ringgit as the interest rate differential will be narrowed between the two countries," he told Business Times.
According to him, keeping the OPR at 3.0 per cent will give a sense of predictability, helping businesses and households to make financial decision such as investing and savings.
He said it will also help support the purchasing power of consumers and businesses especially those who save their money in a bank.
Standard Chartered said it will watch for any tweaks to Bank Negara's inflation outlook given the recent diesel subsidy rationalisation implemented on June 10.
"Our initial estimate is a modest 0.1 percentage point (ppt) impact on inflation given the targeted nature of the subsidy cut. However, we will keep an eye out for second-round effects, especially as there may be further subsidy rationalisation amid Malaysia's growth recovery," it said in a report today.
For now, the bank expects the US dollar-ringgit to recover at a measured pace to 4.65 in the third quarter of 2024 (3Q24) and 4.60 in 4Q24, from last Friday's closing of 4.7087 (end-June: 4.7175, end-2023: 4.5940).
Standard Chartered said the central bank had stated in its May statement that inflation in 2024 was expected to remain moderate, broadly reflecting stable demand conditions and contained cost pressures.
As such, the bank said it will watch for any tweaks that point to broadening cost pressures, which would raise the risk of an OPR hike in late 2024.
It will also monitor changes in Bank Negara's assessment of the ringgit.
"In May, Bank Negara noted that the ringgit currently does not reflect Malaysia's economic fundamentals and growth prospects.
"We view this as an upgrade to the central bank's view from March, when it said the ringgit is currently undervalued, given Malaysia's economic fundamentals and growth prospects," it explained.
UCSI University Malaysia associate professor of finance and research fellow at the Centre for Market Education Dr Liew Chee Yoong said if the global economy shows signs of recovery, it might boost investor confidence, leading to increased demand for emerging market currencies like the ringgit.
"Malaysia's economy is heavily reliant on commodity exports. An increase in prices of commodities like palm oil and petroleum could strengthen the currency. Should the US Federal Reserve signal a pause or reduction in interest rate hikes, US dollar might weaken, indirectly benefiting the ringgit," he said.
According to him, keeping the OPR stable can provide businesses and consumers with a stable economic environment, encouraging spending and investment decisions.
He also said low and stable interest rates keep borrowing costs manageable for both businesses and consumers, supporting economic growth.
"Maintaining a stable OPR rate can help manage inflation expectations which can help maintain price stability in the future.
"Small and medium enterprises will benefit from the stable interest rates as it reduces their financial burdens, enabling them to continue operations and contribute to economic activities," he added.
Liew said the balance between controlling inflation and supporting economic growth is crucial, where maintaining the OPR can help achieve this balance, fostering a conducive environment for sustained economic development.
Tradeview Capital Sdn Bhd vice president Tan Cheng Wen said a normalisation of ringgit will highly likely be triggered by the Fed and whether they actually do cut rates, with most of the street now projecting at most a single rate cut this year.
Looking at consensus projections, he said the country's Consumer Price Index is projected to remain stable at 2.5 per cent from now till 2025.
"There is no incentive for Bank Negara to cut the OPR in anticipation of further subsidy rationalisation by the government which will spur more inflation. Hence, it seems more optimal to maintain rates which is in line with the consensus majority," Tan added.