Malaysia's overnight policy rate, introduced in April 2004, is the third lowest in Asia outside Japan. Only Hong Kong and Taiwan have lower borrowing costs.
Last Friday, Bank Negara has kept its overnight policy rate at 3.5 percent in 20 straight meetings since April 2006, even as other Asian nations raised borrowing costs this year to cool soaring prices.
Asia has the highest trade/GDP exposure of any emerging market region. The credit turmoil and the coming recession in The West dictated that the direction of both monetary policy and currencies in Asia is - rates to be cut and currencies to weaken across the board. Asian countries have so far followed a policy of intervening to cushion the pressure of depreciating currencies.
Asian countries have not pursued such policy done by the Hungarian Government by increasing interest rate to bolster the currency.
The current financial turmoil present a dilemma in choosing how to support their currencies without damaging economic growth. A lower interest rate helps the limping economy but depreciated the currencies.
The chart below showed, the currencies of four SE Asian countries Singapore, Malaysia, Indonesia and Thailand as against the US dollar. The four currencies since one year ago have moved downward with Indonesia and Thailand fared much worse than Malaysia and Singapore.
In the second chart, since 3 months ago, Singaporean, Malaysian and Indonesian currencies have fallen at the same rate but Thai currency is not much affected. Note. Thai Baht suffered a heavy fall since early this year as compared to the three other currencies.
Why does Bank Negara done a rate cut as do other Asian Countries?
``Having been the only central bank in the region not to hike rates this year, Bank Negara will likely argue monetary conditions remain extremely accommodative, and there is no need for easing,'' said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. ``Bank Negara will probably need to see decisive signs of a sharp economic slowdown in the data before it decides to cut rates.''
-With one of the lowest rate in Asia, The Bank Negara feels that the low rate is already accommodative to the present economic situation.
- The government cut gasoline prices three times since late August as crude oil fell from a record in July. With Consumer-price gains slowed to 8.2 percent last month from 8.5 percent in August and falling fuel price, Bank Negara stated that inflation has peaked.
-Bank Negara has generally been cautious rather than using pre-emptive approach to monetary policy making. Bank Negara will probably need to see decisive signs of a sharp economic slowdown in the data before it decides to cut rates.
DBS Bank in its report said that any impact of the financial turmoil on third quarter GDP data, which will be announced late next month, will enable Bank Negara to assess the ground before changing its policy stance.
As for the depreciating currencies against the dollar, most of us wonder with all the tumultuous banking/financial situation in US, why does the dollar is still strengthening?
There are a lot of reasons forwarded by market commentators for the perceived status of US dollar as safe heaven. But one thing is certain that the credit crisis caused the downward spiral in stock market in US and this affected the local Asian markets. Foreign funds in local market which is dominated by the Americans and Europeans have fled fast and furious from the region's emerging markets, repatriating cash to cover positions in home markets left exposed by seized up credit facilities and driving down drastically the region's share prices and currencies. When the situation getting stabilized, the Asian currencies are expected to swing in the opposite direction.
In the second chart, since 3 months ago, Singaporean, Malaysian and Indonesian currencies have fallen at the same rate but Thai currency is not much affected. Note. Thai Baht suffered a heavy fall since early this year as compared to the three other currencies.
