The aggressive pace of the US Fed in raising interest rates would benefit the dollar and indirectly make Malaysia’s exports more competitive. — Bernama photo
KUALA LUMPUR: The aggressive pace of the US Federal Reserve (Fed) in raising interest rates would benefit the dollar and indirectly make Malaysia’s exports more competitive, said an economist.
UOB Kay Hian Wealth Advisors Sdn Bhd head of wealth research and advisory Mohd Sedek Jantan told Bernama that the rise in the US interest rates by 75 basis points (bps) on Wednesday (July 27) to cool inflation would result in Malaysia’s fixed income market likely to suffer from foreign outflows as investors seek higher returns.
“However, this would lead to Malaysia’s exports to be seen as more competitive,” he said.
Mohd Sedek opined that investors would take advantage of the Fed’s latest announcement, especially since Malaysia is taking a more cautious and gradual approach to monetary policy.
“The aggressive pace of the Fed will indirectly make Malaysia’s exports more competitive but the ringgit depreciation also results in pricier imports, especially on raw material,” he said, adding that imported inflation can put pressure on domestic price levels.
The economist pointed out to data by the Department of Statistics Malaysia which revealed that Malaysia’s imports reached an all-time high value of RM124.2 billion in June 2022, with RM64.4 billion being intermediate goods.
“The latest Consumer Price Index of 3.4 per cent year-on-year suggests that cost-driven inflation remains a strong concern, although inflation is still low compared to neighbouring countries.
“Bank Negara Malaysia is expected to increase interest rates by another 25 bps in September if inflation figures continue to disappoint, and this will cause the ringgit to depreciate further,” he said.
Elaborating more on the latest US hikes, the economist said that the pace of tightening from the current level might be more measured and serve as a dollar positive impetus.
He believes that the greenback could go up to RM4.55 in the third quarter of this year before settling at RM4.50 by the year-end.
On Friday, the ringgit strengthened against the greenback to 4.4495/4520 compared with 4.4515/4545 a week earlier.
“What to expect from Fed’s Jackson Hole policy symposium on August 25-27? The symposium will provide a more precise signal as to whether the rise will be maintained at 75bps or reduced to 50bps.
“Future rate hikes (Federal Open Market Committee meeting in September) will depend on the two-month employment report and inflation report. Based on the existing forecast, lesser rate increases will make logical sense at some point,” he added.
Mohd Sedek said the expectation is that the Fed will continue to raise interest rates next year, although at a less aggressive pace, in an effort to control inflation and avert a recession.
In addition, assuming fuel costs decline gradually, the inflation rate might fall to two per cent by the end of next year, he said. — Bernama