KUALA LUMPUR: Cutting interest rates is not an option for Bank Negara to prevent further weakness in the ringgit, said international forex broker FXTM.
A better option for the central bank would be to raise interest rates, said its chief market analyst Jameel Ahmad.
Speaking during a media briefing on the outlook for the ringgit, Jameel said cutting interest rates could lead to the ringgit falling further.
He added that interest rates in Malaysia were relatively low, at 3.25%, compared to Indonesia at 7.5%.
“If you cut interest rates, people are not going to be encouraged to keep their capital in Malaysia.
“So, any reduced interest rates will not help the ringgit at all,” he said.
He said the possibility of Bank Negara having to raise interest rates should not be ruled out.
“It will be attractive for investors, you can encourage more capital inflows, and higher interest rates can also improve the currency value, and then reduce inflation risks.
“I am not saying it is going to occur, but it is an option,” he said.
So far, Bank Negara has maintained the benchmark interest rate at 3.25%, as policymakers believe that this level is an accommodative policy supportive of the economy.
Bank Negara governor Tan Sri Zeti Akhtar Aziz said last month that the sentiment surrounding the ringgit and the economy would be resolved when the uncertainties over the US Federal Reserve’s decision to hike interest rates and other domestic political issues are resolved.
Another measure Malaysia could look at, he said, was a move recently implemented in Nigeria, which banned US dollar deposits.
While the move had been unpopular, he said, it would lead to higher demand for the ringgit if implemented here.
In Indonesia, he said, import taxes were raised in order to boost their currency.
“If the prices of products are more expensive to import, then you will look domestically for your purchases. So this is another option,” he said.
Jameel added that continued government spending would also improve domestic confidence and the potential of the currency.
“Consumer confidence will be high, and this translates to them being more inclined to spend money,” he said.