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PETALING JAYA: Bank Negara Malaysia (BNM) finds itself in the enviable position of having to do nothing to keep the economy and the ringgit on an upward trajectory.

In effect, the central bank just needs to hold the overnight policy rate (OPR) steady even as the US Federal Reserve (Fed) makes its widely anticipated rate cut at the conclusion of its Federal Open Market Committee meeting late yesterday.

The situation BNM finds itself in is a far cry from early this year when the ringgit plummeted to lows last seen during the Asian financial crisis over 25 years ago, sparking alarm bells in the corridors of power.

Since then, the ringgit has seen a stunning turnaround in its fortunes. Even before a Fed rate cut, the ringgit has bounced back from hitting the RM4.80 level against the US dollar in February to being one of the best performing currencies in Asia vis-à-vis the greenback.

The ringgit scaled to its highest level in more than 19 months, up 0.4% at 4.2370 per dollar, yesterday afternoon.

Economist Niaz Asadullah said BNM is indeed in a favourable position given its prudent past choices with regards to the OPR.

He said a rate cut by the Fed, which would be its first since March 2020, will be good news for the ringgit.

With the OPR currently at 3%, the rate differential between Malaysia and the US will further narrow if the Fed considers a rate cut, said Niaz, the Global Labor Organization’s Southeast Asia lead.

With the Fed funds rate at 5.25%-5.5% – a 23-year high – the rate differential with the OPR is 2.5% at the upper band. The market is expecting a 25 or 50 basis point cut in the Fed’s rate.

With the narrowing of the rate differential, more capital inflows into Malaysia’s equity and bond markets are expected, bolstering the demand for the ringgit. Additionally, a weakening US dollar, driven by lower interest rates, should further enhance the ringgit’s performance, he said.

Return of foreign funds

Niaz expects significant appreciation of the ringgit by end-2024 if more foreign funds flow in as international fund managers continue to buy Malaysian equities.

Overall, I don’t see the need for BNM to aggressively adjust its policy, as the current OPR supports a stable economic environment and has helped sustain the ringgit’s recovery, he said.

He said the ringgit’s remarkable recovery from a 25-year low is partly credited to significant inflow of foreign funds as government-linked companies (GLCs) responded to BNM’s directive for repatriating export earnings.

This has significantly increased demand for the ringgit, he pointed out.

Bait Al-Amanah research director Benedict Weerasena said Malaysia’s stronger economic fundamentals including robust economic growth at 5.9% in Q2 2024, price stability with inflation at 2%, and political and policy stability have propelled the positive sentiment among investors.

As evidence, approved investments recorded a 13% increase in Q1 2024. External factors such as an anticipated end to the Fed’s restrictive policy stance and a potential recovery of the yuan have also propped up the ringgit, he said.

BNM and MoF’s role in ringgit’s turnaround

Niaz said both BNM and the finance ministry should be credited for their close coordination and prudent policy choices in the ringgit’s rebound.

This has increased public confidence in Prime Minister Anwar Ibrahim and his team’s ability to turn around the Malaysian economy.

By resisting external pressure to align with the rising Fed interest rate, BNM has listened to the local business community and helped avoid unnecessary increase in the cost of borrowing, he said.

Through its limited but targeted rate hikes, BNM’s monetary policy has helped balance growth and inflation, avoiding unnecessary shocks to the economy.

BNM slashed the OPR to its lowest ever at 1.75% in July 2020 during the Covid-19 pandemic. It subsequently reversed course and hiked the rate by a cumulative 125 basis points to 3% between May 2022 and May 2023.

Niaz also said the MoF has been proactive with fiscal policies including targeted subsidies and economic recovery initiatives.

Together, these policies have helped strengthen Malaysia’s fundamentals, which contributed to the ringgit’s recovery, he added.