KUALA LUMPUR (April 29): The International Monetary Fund (IMF) said Malaysian authorities including Bank Negara Malaysia (BNM) and the Ministry of Finance (MoF) had indicated that the ringgit's exchange rate is the country's first line of defence or "shock absorber" as advanced economies normalise their monetary policies, which involve interest rate hikes to fight inflation.
In a report published on Thursday (April 28), the IMF said Malaysian authorities had reiterated their commitment to the ringgit's exchange rate flexibility.
"However, they also highlighted mitigating factors including the limited external exposure given low reliance on foreign funding, and the general preparedness of the markets based on previous experiences.
"The authorities disagreed on the recommendation to phase out the remaining foreign exchange (FX) market development measures that the fund (IMF) classifies as capital flow management measures (CFMs).
"They view these measures as necessary for financial stability and as prudential in nature, building the resilience of domestic markets consistent with the mandate of BNM," the IMF added.
According to the IMF, the central bank of Malaysia continues to have reservations about the benefits of regular publication of FX intervention data given the trade-offs, including the likely impact on market speculation.
The IMF said its staff prepared the report following a meeting with Malaysian officials, including the governor and deputy governors of BNM and the MoF's chief economist, between Jan 24 and Feb 9.
"Mission dates: Jan 24-Feb 9, 2022. The mission met with the governor and deputy governors of BNM, the undersecretary and chief economist of the MoF, senior staff from various ministries/public sector entities, and representatives of the private sector and civil society.
"The staff report was prepared by a team at the IMF for the executive board’s consideration on April 6, following discussions that ended on Feb 9 with the officials of Malaysia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 7," the IMF added.
According to the fund, the Malaysian authorities agreed with its staff’s assessment of Malaysia, albeit with some reservations.
The IMF explained that the Malaysian authorities viewed the country's monetary policy stance as accommodative with inflation expectations well anchored and policy settings well calibrated to the phase of the nation's recovery and price dynamics.
"Transition to policy normalisation would be guided by sustained narrowing, but not necessarily closing, of the output gap, sustained growth in private consumption, an improved labour market and stronger investment without over-reliance on policy support," the Malaysian authorities were quoted as telling the IMF.
The fund, in its elaboration on Malaysia, said that against the backdrop of monetary policy normalisation in advanced economies, Malaysia's monetary policy should remain agile.
While the country is well prepared to face a gradual increase in global interest rates, a sharp tightening of global financial conditions and risk-off investor behaviour could lead to surges in capital outflows, according to the IMF.
"Under disorderly market conditions (DMCs), exchange rate flexibility, combined with liquidity support, including in foreign currency, and monetary policy accommodation striking a balance between supporting growth and managing capital outflows, should be the first line of defence.
"However, in imminent crisis circumstances, temporary outflow CFMs as part of a broader policy package could be considered in line with the fund’s institutional view," the IMF added.
The fund said the ringgit's exchange rate should continue to serve as a shock absorber, with FX intervention limited to DMCs.
Malaysia's further reserve accumulation is not called for, given adequate reserve coverage and the undervaluation of the ringgit, according to the IMF.
"Malaysia’s relatively liquid FX market, with no strong evidence of FX mismatches that pose systemic risk to the broader financial system, and a mature and multipronged monetary policy framework, limits the argument for FX intervention outside DMCs.
"Accordingly, while employing FX intervention, BNM should consider its interactions with other policies against the backdrop of the moderately stronger external position.
"BNM’s steps to liberalise foreign exchange policy and to deepen the FX market are welcomed. These include the implementation of electronic trading platforms for access and price discovery, the improvement of market trade transparency via daily publication of interbank FX and money market data, and the liberalisation of CFMs.
"In this context, existing CFMs should be gradually phased out with due regard to market conditions. Publication of FX intervention data (with an appropriate lag to guard against market sensitivities) could enhance communication and strengthen the commitment to the monetary policy framework.
"The progress made in the operationalisation of BNM’s multi-tool monetary policy model, leveraging the joint work with the fund on integrated policy framework modelling, is welcomed," the IMF said.
According to the fund, Malaysia's current accommodative monetary policy stance is appropriate.
The real overnight policy rate adjusted for one-year-ahead inflation expectations implies that short-term real interest rates remain close to zero, the IMF explained.
"At the aggregate level, there are no signs of liquidity strains, and domestic financial conditions remain accommodative consistent with the financial condition index.
"The outlook for core inflation remains benign, and headline inflation is projected to remain broadly unchanged in 2022. The significant output gap and the slack in the labour market limit the risk of second-round effects, and inflation expectations are well anchored.
"Monetary policy should remain data-dependent — a tightening would be appropriate if there is strong evidence of de-anchoring of inflation expectations and, conversely, BNM has room to further ease monetary policy, in combination with the supportive fiscal policy, if downside risks materialise," the IMF added.