Malaysia’s exports more competitive with Fed interest rate hikes: economist

KUALA LUMPUR: The US Federal Reserve’s (Fed) aggressive pace of raising interest rates would benefit the dollar and indirectly make Malaysia’s exports more competitive, an economist has said.

UOB Kay Hian Wealth Advisors Sdn Bhd, Head of Wealth Research and Advisory Mohd Sedek Jantan told Bernama that the 75 basis point (bps) rise in US interest rates on Wednesday July 27 to calm inflation would likely drive the Malaysian fixed income market. suffer from foreign capital outflows as investors seek higher returns.

“However, this would lead to Malaysian exports being seen as more competitive,” he said.

Mohd Sedek said investors would benefit from the Fed’s latest announcement, especially as Malaysia adopts a more cautious and gradual approach to monetary policy.

“The Fed’s aggressive pace will indirectly make Malaysia’s exports more competitive, but the depreciation of the ringgit is also leading to more expensive imports, especially for commodities,” he said, adding that imported inflation can exert pressure on domestic price levels.

The economist pointed to data from the Department of Statistics Malaysia which revealed that Malaysia’s imports reached a record value of RM124.2 billion in June 2022, including RM64.4 billion of intermediate goods.

“The latest consumer price index of 3.4% year-on-year suggests that cost-induced inflation remains a strong concern, although inflation is still low compared to neighboring countries.

“Bank Negara Malaysia is expected to raise interest rates by another 25 basis points in September if inflation data continues to disappoint, leading to further depreciation of the ringgit,” he said.

Elaborating further on the latest U.S. rises, the economist said the pace of tightening from the current level could be more measured and serve as a positive boost for the dollar.

He thinks the greenback could rise to RM4.55 in the third quarter of this year before stabilizing at RM4.50 by the end of the year.

On Friday, the ringgit strengthened against the greenback to 4.4495/4520 from 4.4515/4545 a week earlier.

“What to expect from the Fed Policy Symposium in Jackson Hole August 25-27? The symposium will provide a clearer signal as to whether the hike will be maintained at 75 basis points or reduced to 50 basis points.

“Future rate hikes (Federal Open Market Committee meeting in September) will depend on the jobs report and the two-month inflation report. Based on existing forecasts, lesser rate increases will make logical sense at some point,” he added.

Mohd Sedek said the Fed is expected to continue raising interest rates next year, albeit at a less aggressive pace, in an effort to control inflation and avoid a recession.

Also, assuming fuel costs come down gradually, the inflation rate could fall to 2% by the end of next year, he said.– Bernama

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