Of all the mind-boggling things to suggest (excerpt):
KUALA LUMPUR: Cutting interest rates is not an option for Bank Negara to prevent further weakness in the ringgit, said international forex broker FXTM.
A better option for the central bank would be to raise interest rates, said its chief market analyst Jameel Ahmad….
…He added that interest rates in Malaysia were relatively low, at 3.25%, compared to Indonesia at 7.5%.
“If you cut interest rates, people are not going to be encouraged to keep their capital in Malaysia.
“So, any reduced interest rates will not help the ringgit at all,” he said.
He said the possibility of Bank Negara having to raise interest rates should not be ruled out.
“It will be attractive for investors, you can encourage more capital inflows, and higher interest rates can also improve the currency value, and then reduce inflation risks....
Another measure Malaysia could look at, he said, was a move recently implemented in Nigeria, which banned US dollar deposits.
While the move had been unpopular, he said, it would lead to higher demand for the ringgit if implemented here.
In Indonesia, he said, import taxes were raised in order to boost their currency….
This is confusing style with substance, ignoring the forest for the trees, cutting off your nose to spite your face, taking your eye off the ball and probably a whole bunch of other idioms I can’t recall offhand.
When looking at policy options, it helps to pay attention to what’s going on. The exchange rate is one policy lever among many, but the ultimate goal – at least of short term stabilisation policy – is to ensure full employment growth with stable prices. Raising interest rates for to protect the Ringgit directly mitigates against that, by confusing the policy lever with the policy objective.
Higher interest rates raise the demand for money. Does that sound good? It shouldn’t – higher money demand means less money spent on goods and services (which is also the reason why higher interest rates reduce inflation). You’re strengthening/stabilising the currency at the cost of reduced economic (as opposed to financial) activity – less jobs, less incomes. Not exactly what you want with growth already slowing.
Then take the Indonesian example. The reason why Indonesia has a high policy rate is because Indonesia’s inflation is systematically higher than Malaysia’s, something they’ve struggled with for decades. Inflation in Indonesia averaged 6.7% from Jan-Nov 2015, while Malaysia is barely averaging 2.0% (up to October). In other words, on an inflation adjusted basis, interest rates in Malaysia are actually higher.
Moreover, Indonesia runs a current account deficit, so import taxes make some sense, though only if you’re dealing with finished goods and not intermediate goods. In the latter case you’re just killing your own exports. Malaysia of course, is still running a current account surplus. The Ringgit has certainly performed much worse than other regional currencies this year, but since 2000, the Ringgit is up nearly 350% against the Rupiah.
As for banning USD deposits – Nigeria has a trade to GDP ratio of about 30% (in 2014), while Malaysia is at 150%. Nearly 95% of Nigeria’s exports are of oil & gas products produced by a handful of oil giants, while Malaysia has a well diversified export mix covering the gamut from LNG to CPO to semiconductors, with a host of companies large and small involved in trade. Nigeria can afford to do without private FX deposits; we can’t.
Focus, Panda, focus.