This article first appeared in digitaledge Weekly, on September 14 - 20, 2015.

As expected, Bank Negara Malaysia left its key policy rate unchanged at 3.25% last Friday, even as much of the world continued to guess if the US Federal Reserve would raise interest rates for the first time in a decade by Sept 17.

If it doesn’t, the US policymakers will still be meeting in mid-October and mid-December, and market consensus is still for a rate hike to happen by year-end — but not this week, economists say.

There are investors and central bankers who would rather an interest rate hike happened this week so that one uncertainty is removed from the global financial system. They argue that Fed chairman Janet Yellen would know that much of the world is still in uncharted waters. The latter means any rate hike would be “nominal” and gradual instead of one that would spook the market, they say.

Even so, opposition to a US rate hike this year seems to have gained voice, ranging from experts at the International Monetary Fund and World Bank chief economist Kaushik Basu to Bill Gross, the famed PIMCO founder and portfolio manager at Janus Capital Group Inc, who labelled the impending rate hike as “too little too late”. The naysayers argue that a hike would cause the US dollar to further strengthen against most emerging market currencies when growth has ebbed on the back of lower commodity prices and slower China growth. Moreover, central banks in Europe, Japan and China are expected to loosen their monetary policy to stimulate growth.

In its statement last Friday, Bank Negara said “downside risks to growth have increased, arising from the moderating growth momentum in the major emerging market economies, uncertainty in commodity prices and the heightened volatility in financial markets” but maintained its gross domestic product growth forecast at 4.5% to 5.5%.

The latter “suggests that the tipping point for a growth downgrade has not been reached”, Citi Research economists Kit Wei Zheng and Yap Kim Leng tell clients in a note. Nonetheless, they add that Bank Negara’s continued “accommodative and supportive” policy to support growth “suggests that the hurdle for rate cuts is not expected to be cleared” just yet.

For now, given a weak ringgit and already easing monetary conditions, the Citi Research economists do not expect Bank Negara to cut rates this year, “barring significant downside risks to the official growth forecasts”. “We would watch the data to see if the hurdle for rate cuts in 2016 will be cleared,” says their note.

Malaysia’s second quarter GDP was surprisingly strong at 4.9%, bringing growth in the first half to 5.25%. Bank Negara continues to expect growth to be driven by domestic demand, although private consumption is expected to “moderate as households continue to adjust to the Goods and Services Tax (GST) and the more uncertain economic environment”. The third quarter GDP is slated for release on Nov 13, three weeks after the tabling of Budget 2016 on Oct 23.

For the Malaysian consumer, a US interest rate hike could signal further weakness of the ringgit against the greenback as well as the British pound, given that the Bank of England is widely expected to follow a US interest rate hike.

The ringgit has slipped 15.3% against the US dollar in 12 straight weeks, hitting 4.3790 intraday last Thursday before closing at 4.3168 last Friday. It is also down 12.4% against the renminbi in 12 straight weeks, closing at 0.67715 last Friday. It is worth noting here that China is a major buyer of Malaysian goods.

Against the currency of Singapore, another major tourist provider, the ringgit hit a new all-time low of 3.0771 intraday last Thursday before closing at 3.0471 last Friday — down for the seventh straight week.

Bank Negara is slated to announce its latest reserve position for mid-September on Sept 22.

On Sept 4, the central bank said its international reserves stood at US$94.7 billion (RM347.7 billion) as at end-August, which was sufficient to finance 7.4 months of retained imports and was one times short-term external debt. The reserves slipped below the psychological US$100 billion mark in July even as foreigners pulled out funds from the equity market. They fell by US$10.8 billion in July and August alone and are down by a third from their peak of US$141.43 billion in May 2013.

While there are murmurs Malaysia will impose capital controls if the ringgit slides past 4.50 to the US dollar, economists are also not ruling out the possibility of the local currency retracing some of its recent losses.

There is a chance that Bank Negara’s reserves will recover to rise above US$100 billion, especially with exporters being asked to repatriate export earnings and government-linked institutions are tapped to sell foreign assets and raise demand for the ringgit — provided there are no surprises that would significantly increase selling pressure on the ringgit. One factor that could cause the latter would be a sovereign ratings downgrade, experts say.

Still, Bank Negara governor Tan Sri Zeti Akhtar Aziz recently told reporters that the central bank had built up its reserves for use during periods of volatility and that Malaysia had successfully rebuilt its coffers before and can do so again.

In its statement last Friday, Bank Negara said the ringgit exchange rate “will reflect the underlying fundamentals of the economy when the external and domestic uncertainties recede”, adding that it “will continue to ensure the orderly functioning of the money and foreign exchange markets”.

Barclays Emerging Market Research’s Rahul Bajoria, who recently raised Malaysia’s 2015 GDP growth forecast to 5% from 4.5%, concurred that the central bank “is likely to keep monetary conditions stable” and does not expect any policy moves from Bank Negara “for now”.

“So far, as Bank Negara notes, growth remains resilient despite the adverse market conditions,” he says in a Sept 11 note, adding that he expects inflation to “remain moderate and underlying prices to remain benign”.

“We believe Bank Negara is unlikely to mount an interest rate defence of the currency. Hence, we recently pushed back our rate hike call in 4Q2015 to 2Q2016, when we expect the economy to have sufficiently recovered its momentum and inflationary pressures to have turned more demand-led.”

As Bank Negara only expects inflation to peak early next year, the Citi Research economists reckon that the central bank is unlikely to raise interest rates to counter imported inflation. That could mean the ringgit staying weak, especially against the greenback and pound sterling — until all factors battering sentiments on Malaysia are cleared.