Why the Ringgit weakened against the US dollar

Why the Ringgit weakened against the US dollar

When it comes to money and economy, there are three things Malaysians have complained about the most this year:

  • Inflation
  • Overnight Policy Rate (OPR) Increases
  • The weakening of the ringgit against the US dollar

While it may seem like these are three separate factors that signify gloom, doom, and ekonomi kaboom, there’s good news: they’re actually interrelated factors that won’t seem so bad once you see how they come together.

Because, in contrast to this apparently negative outlook, there are signs that the economy is doing quite well. For example:

So…. How is this contradictory information gelled? Well, it’s about understanding how each of the above three factors plays a part in the big picture. So, let’s start with the most complicated one, OPR.

A high OPR increases the interest rate on your loan (but you also get more fixed deposit interest)

Banks make money through interest earned on loans, credit cards, and other investments, but to do all of this, they need to maintain a healthy cash reserve or float. When their float drops below a certain amount, they will have to borrow money from other banks and pay interest. This interest, determined by Bank Negara, is what is known as the overnight policy rate, or OPR.

But if it’s between banks, what does that have to do with us as regular rakyat?

Good, if the OPR goes up, it essentially becomes more expensive to borrow money from the bank because they will have to increase the interest rates on their loans. But only loans with variable interest rates (which can change over time), such as home loans and some business loans, are affected. Fixed-rate loans, like car loans, are not affected.

However, what you may not know is that a high OPR also means a higher interest rate for time deposits. While this would benefit regular Malaysians with savings, it is also highly attractive to foreign investors; keep this point in mind for later.

At this point, you might be thinking, Wahlau Bank Negara… Just make the OPR zero and the rakyat will be minus susah lah! Well then, you would have painted yourself in a corner because…

A low OPR can cause inflation 😨

In general, inflation is not something that a government or central bank can completely control. External factors such as the war in Ukraine and the sanctions against Russia have disrupted the supply of oil and food products such as wheat, driving up prices. There are also other causes of inflation such as devaluation of money and the economy of a country doing also well which one You can read more about here.

But for now, let’s focus on something that a country’s central bank CAN control in some way: interest rates.

Think of it this way: Even if you couldn’t afford it, you bought a new iPhone 14 Pro Max because you got an interest-free loan. Now imagine if everyone started buying an iPhone 14 Pro Max because they got the same loan. If Apple can’t keep up with this increased demand, the iPhone 14 Pro Max shortage will cause prices to skyrocket and… congratulations, we now have inflation.

This concept applies from Apple to apples, because one of the causes of inflation is when demand is greater than supply. So By raising the interest rate, inflation can be controlled. because it discourages people from spending unnecessarily. Basically, you’d be less inclined to buy that iPhone if you had to pay 10% interest on a loan.

In fact, we can see what happens when a country’s OPR stays low when prices rise, because Turkey has been cutting its interest rates since July.

Tukey key interest rate from January 2022. Chart from Trading Economics.

Turkey’s central bank cut interest from 14% to 10.5% in September, and its president, Recep Tayyip Erdogan, aims to lower it to single digits by the end of this year. The result has been an inflation rate of 84.3%, with some goods costing three times their price since the beginning of the year. Not only that, he The Turkish lira has also lost around 50% of its value against the US dollar. which also made them lose investments.

This brings us to the third point in the equation: the US dollar.

The US dollar rose because… their interest rates increased.

yes, basically The United States increased its federal funds rate, which is the American version of OPR. The US Federal Reserve (its version of Bank Negara) has increased its interest rate from a range of 0.25% to 0.5% in March 2022 to 3% to 3.25% in September. This is what the Chairman of the Board of Governors of the Federal Reserve had to say:

Restoring price stability will take some time and requires aggressive use of our tools to achieve a better balance between supply and demand. […] While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some trouble for households and businesses. These are the unfortunate costs of reducing inflation.” – Jerome H. Powell, as quoted in the transcript of his August 2022 speech.

Remember the point about high OPR attracting foreign investors that we ask you to keep in mind? Well, there are investors (such as hedge funds) and traders who have bank accounts all over the world, move your money to whichever country has the best balance between stability and high interest rates – which is currently the US This movement of money also affects the exchange rate because money going out weakens the currency (because fewer people want it), while money coming in strengthens it.

So in order to get this money back, we have to, say it with us now, raise our interest rates. And this is where it all comes together:

You can’t have lower inflation and a stronger ringgit without raising OPR

Policies related to OPR in Malaysia are decided by Bank Negara’s Monetary Policy Committee (MPC) which independently formulates and implements these policies at least 6 times a year. The reasoning behind their decisions is published in the form of monetary policy statements, what can you find here.

When they started raising the OPR in May, their statement indicates that an increase was necessary to fight inflation but, instead of big jumps like the US, the MPC’s strategy was to implement it “in a measured and gradual manner” so that everyone (meaning us) can slowly adapt. In fact, you can see this clearly in the charts below:

The one in Malaysia is so step by step that it actually looks like steps. Both charts from Trading Economics

Apart from the USD, the Malaysian exchange rate is quite strong.

We understood most of the basics of OPR, inflation and finance konsep-konsep yang sewaktu dengannya of the BNM FAQ Y Youtube videos (videos on BM though); which actually contains more information than we have included in this article. One thing the FAQ pointed out is that the Malaysian exchange rate is doing quite well: it has appreciated against the yen, baht, and Korean won. Here is a table detailing the exchange rates from the beginning of the year to the time of this writing:

Lower numbers are better. Click on the table to see the full list of countries on the BNM website

But all that said, it doesn’t mean our economy is great. In fact, it will be difficult for all countries. the The International Monetary Fund has planned a decline in global growth and a rise in inflation during the second half of 2022, while the World Bank published a 40-page policy note titled “Is a global recession imminent?“That almost confirms that the chances of avoiding a global recession in 2023 will be very limited and finances will be tight.

Basically, while rising OPR is not going to be easy for a lot of people, it is the financial equivalent of bersakit-sakit dahulu, bersenang-senang kemudian. If Bank Negara cuts interest rates, it will result in higher prices for the rest of us, hurting the B40 and M40 families especially, as well as Turkey. So for now, you might want to keep your old phone for a little while longer and Deposit your money in a fixed-term deposit account to try out that sweet interest rate.

We hope you found this article. interest-In g!




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