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Monday, 19 February 2018

(The Star) Option is open for second interest rate hike this year

PETALING JAYA: Bank Negara is keeping its options open for a second interest rate hike this year, according to economists, which should hold the ringgit on a stronger footing.

The local currency had strengthened 3% so far this year at 3.89 against the weakening US dollar.

“We think Bank Negara has not closed the door on a second hike in the second half of 2018 if demand-driven price pressures surface,” CIMB Research said in a recent note.

Bank Negara, in its first monetary policy in January, raised the overnight policy rate by 25 basis points to 3.25%. The move helped propel the ringgit to its highest level against the US dollar since April 2016.

The European Union announcement last week that the region’s economy in 2017 grew at its fastest pace since the 2007 global financial crisis had reiterated the ever-increasing optimism over the global economy.

“It is only a matter of time before other major central banks prepare the financial markets for their own adjustments to increased interest rates,” FXTM global head of currency strategy and market research Jameel Ahmad said in a report.

This eventuality, he said, posed a significant risk of weakening investor attraction towards the US dollar.

Jameel expects the US dollar to weaken further.

“It might sound strange on headline, considering that expectations are high for the Federal Reserve to raise US interest rates multiple times this year, but US interest rate policy is no longer a ‘pull’ for investors to purchase the US dollar,” he said.

The US dollar had fallen by about 4% against major currencies so far this year.

“The other currencies that would likely benefit heavily from a further round of selling in the US dollar are those in the emerging markets,” Jameel said.

Higher-yielding currencies like the South African Rand has gone up 6.5% in 2018, while the Thai baht had gained 4% year-to-date.

The first interest rate hike in January had sparked a rush for the ringgit. Growing expectation of further increase could propel the currency even higher.