Ringgit affected by offshore activities not reflecting fundamentals, says Bank Negara

Ringgit-BNM-1

The central bank also said with reference to the BNM Governor Datuk Muhammad Ibrahim's speech at the Financial Markets Association annual dinner on Nov 18, the Financial Markets Committee (FMC) members welcomed the announced initiatives and strategies to further deepen the liquidity on the onshore market while providing more flexibility for market participants to manage foreign exchange risks with onshore banks.

The ringgit fell as much as 0.5 percent to the lowest in more than 13 months after Bank Negara Malaysia warned foreign banks this month against using offshore forwards to bet against the currency.

Bank Negara said last week there will be continued restrictions for avenues that could be used to support speculative activities in the currency market.

The economy remains on track to expand as projected this year and next, the central bank said.

In July, BNM unexpectedly cut its key rate by 25 basis points.

"Given rising currency volatility associated with Trump's victory in the USA presidency election, we believe there is a strong likelihood for the central bank to be cautious and keep [the] interest rate unchanged at the current level of 3% in 2017".

Malaysia has been hard hit by capital outflows from emerging markets as investors expect US interest rates to rise faster under a Trump administration that is expected to opt for an expansionary fiscal strategy that will fuel inflation. These factors could result in periods of volatility in the regional financial and foreign exchange markets.

The central bank said the current level will ensure the domestic economy continues on a steady growth path. "Global financial market conditions are likely to be susceptible to policy and market developments", said BNM.

The latest decision suggests that BNM is "more anxious about supporting the weak currency than boosting the sluggish economy", said Capital Economics analyst Krystal Tan. Banking system liquidity is ample.

Economists said recent weakness of the Malaysian ringgit, which slumped almost 6% against the USA dollar in this month alone, will likely remain a key consideration in the near term for the central bank.

Bank Negara said inflation will probably be at the lower end of the 2 per cent to 2.5 per cent forecast range for this year and is "expected to remain relatively stable in 2017".

"Financial institutions continue to operate with strong capital and liquidity buffers and the growth of financing to the private sector is consistent with the pace of economic activity", Bank Negara added. In accordance with the Central Bank of Malaysia Act 2009, the MPC will convene six times during the year.

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