BNM’s ‘Pseudo Tightening’ Will Not Stem Ringgit’s Slide!

Central banks in Southeast Asia including Bank Negara Malaysia (BNM) have opted in recent months to defend their battered currencies. This is not by raising interest rates but via “pseudo tightening”. This essentially means using other tools such as selling government securities or bonds to attract foreign inflows and reduce reliance on interest rates. 

Malaysia and other Asean countries (except Singapore) are in a quandary. The rate differential between benchmarks from Southeast Asia and the US has continued to widen as central banks in Malaysia, Indonesia and the Philippines paused rate hikes in the first half of the year.

The ringgit’s steady decline has put intense pressure on BNM to stem its heavy slide. The local note plunged to a new all-time low of RM4.76 per US dollar on 20 October 2023, to levels only seen during the depths of the Asian Financial Crisis 25 years ago.

Source: freemalaysiatoday.com

Malaysia’s overnight policy rate (OPR) of 3% is now at a 250-basis point discount to the Fed fund rate, which is a record gap. Despite the widening gap, most regional central banks are avoiding the obvious textbook response, which is to hike rates for fear of derailing their economies. BNM, which paused its OPR hike cycle in July after four consecutive 25bps increases, is no different. As a result, Southeast Asian central banks are becoming more tolerant of “pseudo tightening”. Central banks across the region may continue using a combination of liquidity tightening and intervention to lean against further depreciation in their currencies against the dollar.

Outflows will worsen if the interest rate differential with the Fed fund rate continues to widen; safe havens become more attractive; China’s economy goes into a tailspin and our trade is impacted; and, local inflation rate is exacerbated because of imported inflation (due to net food imports). The end result is what some others and I have said for months – “see you at 5”!

Reference:

BNM’s ‘pseudo tightening’ fails to stem ringgit’s slide, David Pillai, FMT, 20 Oct 2023