The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
The Malaysian Institute of Economic Research (MIER) has stated that the ringgit is currently undervalued but is fairly valued between 3.90 and 4.20 against the US dollar. This assessment comes after a period of underperformance by the ringgit, which was trading at 4.34 to the dollar at the time of the report.
Key Insights:
Fair Value Indicators: MIER’s valuation is supported by indicators such as the Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER), both of which suggest that the ringgit's fair value lies within the 3.90-4.20 range against the US dollar.
Potential Impact of US Rate Cuts: The report highlights that a cumulative 100 basis points rate cut in the US federal funds rate in 2024 could narrow the interest rate differential between the US and Malaysia to 125-150 basis points. This could be favorable for the ringgit as investors might diversify their holdings in search of better returns.
Supportive Domestic Factors: Domestic economic factors such as fiscal reforms aimed at reducing the budget deficit, strong GDP growth expected to reach or exceed 5% in 2024, and robust foreign direct investment are seen as supportive of the ringgit’s value. Additionally, the repatriation of funds by government-linked companies and a sustained current account surplus driven by exports in electronics, tourism, and services further bolster the currency's outlook.
Foreign Investment Inflows: Foreign investments into Malaysia’s equity and bond markets have shown positive trends. After an outflow of RM823.6 million earlier in the year, the equities market saw an inflow of RM1.3 billion in July. In the bond market, foreign inflows reached RM874.6 million in the first half of 2024.
Exchange Rate Forecast: MIER expects the ringgit to appreciate to between 4.20 and 4.25 by the end of 2024, improving from 4.59 at the end of 2023. However, the continued strength of the US dollar may keep the ringgit’s average exchange rate around 4.60-4.64 against the dollar, slightly higher than the 4.56 average in 2023.
Conclusion: While the ringgit is currently undervalued, various economic factors, both domestic and international, suggest that it is fairly valued between 3.90 and 4.20 against the US dollar. With expected improvements in the economic outlook and foreign investment inflows, the ringgit may see gradual appreciation by the end of the year, although the strong US dollar could temper these gains.
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