Malaysia Should Emulate Yuan ‘Repeg’ Before Rate Cut, MIDF Says

By David Yong

Nov. 24 (Bloomberg) -- Malaysia should follow China by “repegging” the ringgit against the dollar before embarking on any interest-rate cuts to revive economic growth, according to MIDF Amanah Investment Bank Bhd.

A slide in the ringgit to a two-year low in November will limit Bank Negara Malaysia’s ability to reduce its overnight policy rate from 3.5 percent today, Zulkifli Hamzah, head of research at the Kuala Lumpur-based company, said in an interview. The benefits of lower borrowing costs would be eroded by the loss in purchasing power from a weaker currency, he said.

“The current decline in the ringgit is hard to swallow, given that the U.S. economy is in a much weaker condition than it was during the Asian financial crisis,” Zulkifli said. “If policy makers were to take their cue from China, they would repeg before they reflate.”

Malaysia’s central bank has kept interest rates on hold for the past 20 straight meetings since April 2006. China’s policy makers cut the one-year lending rate three times since September and at the same time slowed the pace of yuan appreciation against the dollar. They also allowed faster gains in a trade-weighted basket of currencies.

The ringgit, whose link to the dollar was scrapped hours after China abandoned its decade-old peg in 2005, declined 2.3 percent versus the dollar in November, headed for a fourth monthly decline. The yuan has climbed 0.16 percent after appreciating 0.13 percent in October. The currency fell in September and August.

‘Argument Breaker’

China’s currency has gained 2.54 percent in November against the trade-weighted basket of currencies, rising every month this year except February.

“A sliding ringgit would be an argument breaker against the proponents of a rate cut,” Zulkifli said. “Malaysia should consider repegging before easing interest rates.” He declined to suggest any specific ringgit level.

The ringgit dropped 0.1 percent to 3.6250 per U.S. dollar as of 1:19 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency has declined 7.9 percent in the past three months, while the yuan was little changed at 6.8293.

MIDF said Malaysia tends to pay special heed to the policy actions in China for two reasons. Economic growth in the two countries is more correlated as regional trade expanded and both nations imposed capital controls that made their currencies non- convertible offshore, Zulkifli said.

‘Stabilization Policy’

Bank Negara has kept its overnight policy rate at 3.5 percent even as inflation in Southeast Asia’s third-largest economy slowed from a 26-year high of 8.5 percent in July.

Half of the 16 economists surveyed by Bloomberg News predict the central bank will leave the rate unchanged today. Seven expect a cut to 3.25 percent and one called for a 50 basis-point reduction. A basis point is 0.01 percentage point. The decision is expected after 6 p.m. in Kuala Lumpur.

The central bank is unlikely to alter its rate before March until there’s greater clarity of the impact of a 7 billion ringgit ($1.93 billion) fiscal stimulus package and there’s strong intervention to keep the ringgit exchange rate stable for a sustained period of time, MIDF said.

“Repegging the ringgit maybe viewed as a bad move for the market by some quarters,” Zulkifli said. “But it is a stabilization policy which should take precedence over the market” under current conditions.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.