KUALA LUMPUR: The ringgit yesterday surpassed the psychologically important mark of RM4.60 to the US dollar.
This brings the currency closer to its all-time historical low of 4.885 per US dollar in 1998, during the Asian Financial Crisis and just prior to when the then Prime Minister Tun Dr Mahathir Mohamad announced capital controls and also, the RM3.80 peg on the ringgit.
The ringgit ended the day at RM4.601 to the US dollar yesterday, weakening by 0.52% throughout the day.
Its decline is also in tandem with the risk off sentiment seen in other global currencies, such as the British pound.
Socio-Economic Research Centre executive director Lee Heng Guie told StarBiz that pressures on the local exchange rate will continue in the near term until the US Federal Reserve (Fed) has completed its monetary tightening cycle, which is expected in the first half of 2023.
“Any moves to impose capital controls or to peg the ringgit again by the government to stem the slide could prove futile and counter-productive as well as cause detrimental ramifications on the ringgit, domestic equity and bond markets,” he added.
Lee further noted: “Capital controls and re-pegging of the ringgit would result in more capital outflows and accentuate further sliding of the ringgit.”
Lee said the local currency, which operates under a flexible exchange rate regime, will have to absorb the volatility of capital flows and investors’ preference towards higher-yielding assets, as in this case – the US dollar assets such as the US 10-Year Treasury.
“Investors look to buy currencies with higher interest rates as it creates an additional rate of return on their currency exchange.
“The ringgit, along with other regional currencies have been subjected to the strong US dollar backed by the Fed’s aggressive monetary tightening to kill inflation even it means inflicting a recession on the US economy,” Lee said.
He noted that Bank Negara’s press release, which was issued last week on the ringgit, is a testament that the central bank will ensure the domestic foreign exchange market will continue to function orderly, and domestic liquidity remains ample to support the economy.
It is important now for the country to continue enhancing its economic and financial resilience, including implementing key reforms to strengthen the fundamental support for and longer term confidence on the ringgit, Lee pointed out.
To do this, he suggested that the country sustains the inflows of dependable long-term investment inflows, the continued accumulation of trade surplus and build a war chest of foreign exchange to strengthen the defenses for the ringgit.
Meanwhile, estimates among analysts vary but on a more optimistic note, stated that global inflation could start ebbing from as early as the end of this year.
But among the more conservative estimates by analysts and economists put inflation as beginning to only ease in the second half of next year.
The potential easing in inflation will strengthen the case for global central banks such as the Fed and the European Central Bank to slow down their rate hikes, although the risk is that rate hikes will still continue in the near term.
This will also then reduce the pressure on Bank Negara to raise interest rates.
“Moving into the second half of 2023, prices may start to taper off mainly due to a potential normalisation in global supply chains, coupled with back-to-back interest rate hikes by major central banks.
“Nevertheless, the current combination of high inflation and slow economic growth raises the risk of a stagflationary episode,” Kenanga Research said.
It noted that the annual headline inflation rate in the United States in August at 8.3% and the United Kingdom at 9.9% eased marginally due to a fall in petrol prices.
“However, underlying price pressures as measured by core inflation continued to trend higher, highlighting that inflation may continue to remain high and would not return to the 2% inflation target anytime soon, despite global central banks’ aggressive rate hikes,” the research house added.
It noted that the Russia-Ukraine war may continue to push food prices higher in the near term due to the slow pace of grain and fertiliser exports from Russia.
It also said electricity bills may continue to climb in Europe as the indefinite shutdown of the Nord Stream 1 pipeline continues to exacerbate Europe’s energy crisis.
Meanwhile, Lee said inflation back home may moderate from 2023 due to the projected slower economic growth and domestic demand as well as the high base effect.
“Nevertheless, domestic policy measures such as subsidy rationalisation on fuel, food and electricity tariff could inflict upward price pressures. Both direct and indirect impact of the weakening ringgit are also at play,” he noted.
On this front, he said global crude oil and commodity prices remain the wild card.
“We estimate the consumer price index to increase by 3.5% in 2022 and an estimated 2.5% to 3% in 2023,” Lee said.
Meanwhile, AmBank group’s economists Anthony Dass, Azri Azhar and Muhamad Farid Anas Johar said in their latest report that Malaysia’s inflation numbers for August, which was at 4.7%, is equivalent to 0.2% on a month-on-month increase, the slowest pace in four months.
“This brings inflation year-to-date to 3%. We revise our inflation outlook to 3.6% this year, with an upside surprise of 3.8% and a downside of 3.2%,” said Dass.