KUALA LUMPUR (June 4): Bank Negara Malaysia may allow an orderly depreciation of the ringgit rather than cutting interest rates to cap volatility and sustain the country's economy, according to Credit Suisse.

Credit Suisse analyst Santitarn Sathirathai said Bank Negara had been mindful of the ringgit's depreciation against the US dollar. However, he said Credit Suisse believed Bank Negara was more keen to minimise foreign exchange rate volatility than curbing the currency's weakness.

“In Indonesia and Malaysia, the currencies have already come under considerable pressure, depreciating 5% to 7% in both cases against US$ and hence both central banks came out to express concerns over foreign exchange (FX).

“However, we think the central banks' move was more to cap excessive volatility than to stop depreciation altogether. We reckon Bank Negara Malaysia will respond to the likely slowdown by allowing for weaker ringgit rather than cutting rates," he said.

The ringgit weakened to 3.7073 against the US dollar at 2:43pm today. Bloomberg data shows that over the last one year, the ringgit weakened from its strongest level at 3.1415 on August 28, 2014.

The ringgit had weakened in tandem with lower prices of crude oil, which constitutes a crucial portion of the Malaysian economy. However, the ringgit had also depreciated against a strengthening US dollar in anticipation of US interest rate hikes this year.

Today, Santitarn said Malaysia was among five Asian countries that were likely to favour an orderly depreciation in their currencies to ensure exports remained competitive amid domestic demand headwinds.

He said the list of countries included South Korea, Indonesia, Taiwan and Thailand.

"Negative terms of trade shock in Malaysia and Indonesia, and serious competitiveness issues in Thailand could provide some economic justifications for these currencies to trade weaker on an inflation-adjusted trade-weighted basis.

"Reliance on exports should increase, as domestic demand recovery face some major headwinds. Elevated household debt should cap consumer spending strength in Korea, Malaysia, and Thailand. Subsidy cuts would weigh on consumer and business purchasing power in Indonesia and Thailand," he said.