Malaysia unlikely to slash rates in 2024, offering positive counterweight over low interest rate narrative — MARC

• Whether correctly or incorrectly, Malaysia’s current “supportive monetary policy” may be construed as “accommodative or dovish,” especially in relation to higher interest rates in several other economies.

KUALA LUMPUR (March 19): Malaysia is one of the few countries that are not expected to cut its interest rates this year, according to the Malaysian Rating Corp Bhd (MARC).

This presents a “positive counterweight narrative to Malaysia’s comparatively low interest rates” when compared to median interest rates of 9.25% in the Americas, 5.25% in Europe, the Middle East and Africa, and 3.5% in the Asia Pacific.

“The market’s expectation of stable interest rates in Malaysia, in contrast to rate cuts in most other countries, suggests that Malaysia’s current interest rate is a result of interest rate normalisation which has increased only moderately in recent years,” MARC said.

Whether correctly or incorrectly, Malaysia’s current “supportive monetary policy” may be construed as “accommodative or dovish,” especially in relation to higher interest rates in several other economies, MARC said. A dovish statement leaning towards lower interest rates can lead to currency depreciation, it noted.

The rating agency noted that the underlying issue affecting the ringgit may be influenced by international portfolio funds that tend to flow from lower interest rate regimes to higher interest rate regimes, due to yield-seeking behaviour.

Nevertheless, its interest rate policy could be strategically communicated to highlight Malaysia’s strong fundamentals and express the retention of policy flexibility, without hinting at an accommodative policy, MARC said.

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It noted that while inflation has dropped over time, Malaysia’s core inflation rate is not low and is consistent with the long-term average, with the potential for upward pressures as subsidies are rationalised.

“Furthermore, Malaysia’s healthy banking system and its sound credit quality are sufficient to withstand an increase in the policy rate,” it added.

Still, low interest rates have influenced a shift from savings to borrowings, impacted pension funding and retirement savings, and affected the flow of international funds into the country.

It highlighted that Malaysia’s gross savings as a share of gross domestic product (GDP) dropped to 26.6% in 2022 from 32.7% in 2002. Consequently, the household debt-to-GDP ratio rose to 81.0% in 2022 from 67.2% in 2002.

Despite this, low interest rates may encourage a tendency towards an expansionary fiscal policy and a fiscal deficit which, in turn, will raise money supply, lower the price of money and cause depreciation pressures on a currency.

It noted that plans have been made in Malaysia to contain and lower the fiscal deficit over time.

"However, the financial market’s — including the ringgit’s — reaction to these measures depends on the management of expectations, including the ability to meet or exceed originally planned targets on GDP growth and the fiscal balance-to-GDP ratio," it added.

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