This essentially means using other tools such as selling government securities or bonds to attract foreign inflows and reduce reliance on interest rates, which if tightened too much may hurt the domestic economy.

Malaysia and other Asean countries are in a quandary. The rate differential between benchmarks from Southeast Asia and the US has continued to widen as central banks in Malaysia, Indonesia and the Philippines paused rate hikes in the first half of the year.

The ringgit’s steady decline has put intense pressure on BNM to stem its inexorable slide. The local note plunged yesterday to a new all-time low of 4.7703 per US dollar, to levels seen during the depths of the Asian Financial Crisis 25 years ago.

Malaysia’s overnight policy rate (OPR) of 3% is now at a 250-basis point discount to the Fed fund rate, which is a record gap.

Despite the widening gap, most regional central banks are avoiding the obvious textbook response, which is to hike rates for fear of derailing their economies. BNM, which paused its OPR hike cycle in July after four consecutive 25bps increases, is no different.

As a result, Southeast Asian central banks are becoming more tolerant of “pseudo tightening”, said Abhay Gupta, a strategist at Bank of America in Singapore.

“We expect central banks across the region to continue using a combination of liquidity tightening and intervention to lean against further depreciation in their currencies against the dollar,” he told Bloomberg recently.

He noted that it is not just Indonesia, but central banks in Malaysia and the Philippines are also using sales of securities to tighten liquidity and drive rates higher.

With the ringgit under pressure, BNM said on June 27 it would “intervene” in the foreign exchange market to stem currency movements that are deemed excessive.

Exercise in futility?

Several economists that FMT Business spoke to are unconvinced that BNM’s “pseudo tightening” approach will be effective in keeping the ringgit stable.

Center for Market Education CEO Carmelo Ferlito said what central banks are trying to do now is pause interest rates as they fear a recessionary effect if they raise rates. He noted that they are instead selling securities or notes to attract the inflow of foreign currency.

“I doubt these moves will have a significant effect as they do not solve the root cause of the weakness (in their currencies),” he said.

He attributed the root cause to two main factors, namely political uncertainty in the region, particularly in Malaysia, where there is a fragile government, and in Indonesia where elections are due in a few months.

The second factor is the situation of China which is grappling with a weakening economy and geopolitical threats, he said.

“All these factors are not playing well for Southeast Asia, including Malaysia. We have geopolitical tensions and political uncertainty. You can’t solve this with monetary policy.

“If the currency weakness is not related to liquidity issues, then there is not much you can do with monetary policy,” he said.

However, Ferlito said it can signal to investors that Malaysia is a country where businesses are welcomed, where the government does not interfere in the market, and where conducting business is easy and banking regulations are friendly.

“In a nutshell, (the government must) improve the business ecosystem and withdraw from interfering with the economy,” he said.

Geoffrey Williams of Malaysia University of Science and Technology concurred that BNM’s pseudo tightening approach will unlikely stabilise the ringgit in the current situation.

“No, it will have no systematic effect. The exchange rate in the short-term is determined by market sentiment which, in turn, is affected by multiple factors which change in non-systematic ways.

“In the long-term the exchange rate is determined by underlying macroeconomic factors in Malaysia relative to (factors) outside of the country,” he said.

Dilemma of Asean central banks

Sunway Business School economics professor Yeah Kim Leng said outflows will worsen if the interest rate differential with the Fed fund rate continues to widen given Asean central banks are more reluctant to raise interest rates because of weakening economic growth.

“They will be caught in a dilemma to raise interest rates to narrow the rate differential so the currency does not weaken too drastically, and at the same time sacrificing growth because of higher interest rates,” he said.

Yeah said the differential is destabilising for the global economy as the dollar has resumed its upward trajectory especially against emerging economies as funds flow back to US financial markets to leverage on high yields there.

Something will have to break sooner or later. Bank Indonesia’s surprise rate hike yesterday is an example of growing exasperation among regional policymakers over currency weakness due to higher-for-longer Fed bets.

Indonesia seems to have thrown in the towel in using pseudo tightening to stabilise its currency. With the ringgit in dire straits, BNM may well be pressured to follow suit by raising the OPR at its next Monetary Policy Committee meeting on Nov 2.