Malaysia’s central bank will probably raise interest rates once more this year to attract capital and boost foreign reserves to shield the ringgit from a potential global slowdown, Morgan Stanley said.
The CHART OF THE DAY shows the nation’s reserves have stayed below the 2008 peak while those of neighboring Thailand and Indonesia climbed above levels before the global crisis. The lower panel shows Bank Negara Malaysia was the first central bank in Southeast Asia to increase borrowing costs this year, and it surprised half the economists surveyed by Bloomberg when the overnight policy rate was raised to 2.75 percent on July 8.
“Concerns regarding pressures on capital accounts and, consequently, currency and foreign-reserve levels, may still be lingering,” Morgan Stanley economists led by Deyi Tan said in a report the day after the central bank’s decision. “A policy rate rise would help to arrest the weakness on the capital account with the interest-rate differential effect. The window of opportunity closes when other central banks begin to normalize policy rates.”
Bank Negara has increased its benchmark rate by a combined 0.75 percentage point its past three meetings, helping the ringgit become Asia’s best performer against the dollar this year. In Thailand and Indonesia, where foreign reserves have risen above 2008 levels, policy makers have kept borrowing costs unchanged this year. The three nations were at the fore of the Asian financial crisis in the late 1990s, set off by Thailand’s devaluation of the baht.
The accumulation of reserves is one tool Asian nations can use to combat excessive capital movements, International Monetary Fund Managing Director Dominique Strauss-Kahn said this week. Malaysia’s holdings were recently about $94.8 billion, or 25 percent, below a June 2008 peak, compared with Thailand’s, which have climbed 40 percent to $147.8 billion in the same period, data compiled by Bloomberg show. Indonesia’s reserves have increased 28 percent to $76.3 billion in the past two years.
“In the event that a second global recession materializes, the support to foreign reserves from rate hikes now would help preserve the ammunition needed to protect the currency later on,” the Morgan Stanley economists said.
(To save a copy of the chart, click here.)
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
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