'Inflation rate in Malaysia has now dropped to a 14-month low', said Kar Yong Ang, the OctaFX financial market analyst, adding that it was 'certainly not the kind of macro environment that will prompt the BNM [Bank Negara Malaysia, Malaysia's central bank] to consider more rate hikes in the near-term.'
Malaysian ringgit (MYR) lost 0.1% immediately after the CPI report came out, trading at around 4.576 vs the U.S. dollar. Still, USDMYR is down almost 2% so far this month, despite the fact that BNM opted not to raise its benchmark interest rate on July 6. 'The recent strength of the ringgit has very little to do with the local factors', said Kar Yong Ang. 'USDMYR plunged primarily because disinflationary trends in the U.S. have accelerated and the Fed [Federal Reserve, the U.S. central bank] is now widely expected to deliver just one more rate hike this year', he added.
The question now is—can BNM afford to pursue a less aggressive or more dovish monetary policy? Has BNM reached a peak in rates and can it now consider to focus on rate cuts? Not so fast, the analysts claim. Rate cuts are normally associated with an imminent recession or declining economic activity, which is not currently observed in Malaysia. Industrial output surged 4.7% y-o-y in May, while trade balance improved to +25.8 billion USD in June.
'I think that BNM is certainly pleased to see price pressures ease, but core inflation is still above 3.0%, which is not entirely comfortable', said Kar Yong Ang. 'The economy is not doing all that bad, but I think BNM will just stay on the sidelines for now, observing how the situation unfolds. It is too early to relax and turn dovish', he added.
Like every other central bank, BNM officials will watch carefully the Fed's press conference this Wednesday for any cues on the trajectory of rate hikes in the near term. 'Forward guidance will be key. If the Fed claims that inflation is under control, the market might interpret it as a dovish sign and then the ringgit might appreciate, with USDMYR falling towards 4.500 and possibly lower', said Kar Yong Ang.
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OctaFX is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services already utilised by clients from 180 countries who have opened more than 42 million trading accounts. Free educational webinars, articles, and analytical tools they provide help clients reach their investment goals.
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In the APAC region, OctaFX managed to capture the 'Best Forex Broker Malaysia 2022' award and the 'Best Global Broker Asia 2022' from Global Banking and Finance Review and International Business Magazine, respectively.
