US rate hike to have little impact on Malaysian currency, stocks

PETALING JAYA: Malaysia is expected to see minimal downward pressure on the equity market and the ringgit from short-term capital outflows with the latest 25-basis point interest rate increase by the US Federal Reserve (Fed), said the Malaysian Institute of Economic Research executive director Dr Zakariah Abdul Rashid.
“The rate hike is expected, so the effect has been factored in by players in the market. If there’s short-term capital outflow, there will be pressure on the ringgit to depreciate further,” he told SunBiz.
The ringgit, however, closed stronger against the greenback yesterday at 4.438. Year to date, ringgit has averaged 4.45 against the US dollar. Bursa Malaysia’s benchmark index, the FBM KLCI, also closed higher, gaining 1.15% or 19.78 points to 1,737.14 yesterday.
Zakariah opined that the indication by the Fed of another two rate increases this year is a move to “test the market”.
“We (Malaysia) have to adjust. We have to wait and see. The adverse effect of the interest rate hike will have to be monitored closely. Perhaps the effect will not be that great on Malaysia and most other countries because it has been expected.”
United Overseas Bank (Malaysia) Bhd economist Julia Goh said it has always held the view that Bank Negara Malaysia’s Overnight Policy Rate (OPR) will remain unchanged at 3% this year, even if the Fed affects two more rate hikes.
“We still think that Bank Negara Malaysia (BNM) will keep the OPR unchanged this year, because of the uncertainties. For BNM, the decision to change the rate is largely dependent on the domestic economic condition,” said Goh.
She said Malaysia’s economy has been holding up and confidence in the economy has improved, hence there is less pressure to cut interest rates. There has been improvement in exports, manufacturing output, as well as support from domestic sources of growth, and oil prices have recovered somewhat.
“However, there are external risks lingering, because there is still uncertainty from trade policies abroad and geopolitical uncertainties in Europe. From that perspective, and despite higher inflationary pressures, we don’t think BNM would need to raise rates at this point,” said Goh,
who maintained her gross domestic product growth projection for Malaysia at 4.5% this year.
Kenanga Research expects the ringgit to remain volatile in the medium term, but stable in the short term. It said the ringgit is expected to see a rocky patch from the Fed’s rate hike though it believes that its impact will be somewhat muted given that the market has anticipated a rate increase for a little more than a week now.
“Moving forward, the ringgit will likely be tested further on the toss-up odds of a June rate hike, likely testing the RM4.60/US dollar level. Despite increasing certainty of a June rate hike, we believe that actual policy details, rather than ideological and sentiments, will be required for the markets to fully price in a June rate hike.” 
Regardless, it expects BNM to commit to defending the ringgit against exchange rate volatility via open market operations, particularly if the ringgit crosses the RM4.50/US dollar psychological threshold.
“For now, our year-end target for the US dollar-ringgit remains unchanged at 4.35. Meanwhile, we expect BNM’s monetary policy to remain unchanged for the rest of the year,” said Kenanga.
HLIB Research maintained its ringgit forecast at RM4.30-4.55/US dollar for 2017.
The research firm said in its note that while bond outflows may continue given an improving global economy (monetary policy tightening), ringgit support emanates mainly from higher commodity surplus (firmer prices and higher volumes) as well as BNM’s foreign exchange measures, which provide a buffer to counter the bond outflows.