(Bloomberg) -- Malaysia’s central bank cautioned that the ringgit’s outlook may remain uneven amid fluctuating expectations on global monetary policy, and pledged to preserve confidence in the currency that remains one of Asia’s worst-performers.

Bank Negara Malaysia Governor Abdul Rasheed Ghaffour said he was mindful that a “persistent and material undervaluation of the ringgit” could have permanent implications on the economy, if not addressed.

“As the global monetary policy tightening cycle has likely peaked, financial markets expect pressure on the ringgit to abate,” Abdul Rasheed said in a foreword of the bank’s annual economic and monetary report released on Wednesday. “However, the road ahead may still be bumpy.”

Policymakers have taken coordinated measures to shore up the currency, helping it to rebound from a 26-year-low reached last month. The ringgit succumbed to renewed pressure though in the past week as bond traders scaled back their US interest-rate cut forecasts ahead of Wednesday’s Federal Reserve meeting.

“On and off, we may see changing and differing market expectations regarding the monetary policy trajectory of advanced economies,” Abdul Rasheed said. “This, in turn, will affect the ringgit.”

The central bank is working with the government to increase inflows and allow the currency to better reflect economic fundamentals and prospects, according to the governor. Such steps include: 

  • Encouraging government-linked companies and investment firms to repatriate foreign income and convert it to ringgit
  • Increased engagement with exporters and international investors to promote conversions and underscore Malaysia’s investment appeal
  • Providing a favorable environment for global investors to invest in Malaysia and continuing to allow dynamic hedging flexibilities

Subsidy Reforms

The ringgit’s weakness has been in large part due to the record differential between Malaysia’s key rate and the upper bound of the Federal Reserve’s benchmark. The central bank last adjusted the overnight policy rate in May.

Going forward, any changes to monetary policy will need to carefully assess the effects of Malaysia’s plans to reform subsidies on prices and growth, Abdul Rasheed said. The central bank said it expects the impact of price pressures from such a move to last for about a year. 

The government will unwind blanket subsidies for the RON95 fuel — Malaysia’s cheapest and most commonly used gasoline — once it has decided on a date, Economy Minister Rafizi Ramli said Monday. Malaysians have until end-March to update their income details in a central database known as PADU, which authorities will then use as a guide to identify those eligible for government programs, aid and subsidies. 

Monetary policy response may not be required when relative price adjustments are transitory and likely to normalize over a reasonable period of time, according to the governor. 

Headline inflation has been steady at 1.5% in the three months to January. That’s the lowest rate in Southeast Asia after Thailand, where consumer prices have been printing negative since October.

Improving investor sentiment as a result of the government’s spending reforms will also “help reinforce the value of the ringgit and ensure that it appropriately reflects our strong domestic fundamentals,” he added.

Room for Optimism

BNM, in its reports Wednesday, also trimmed its 2024 headline inflation expectations to range within 2%-3.5%, compared with its earlier forecast of 2.1%-3.6%. That range incorporates some potential upside from the implementation of the fuel subsidy rationalization, according to the report.

Bank Negara maintained its growth projection for the year at between 4%-5%, citing an improvement in external demand. Malaysia’s recent economic indicators suggest growth is regaining momentum after moderating last year, with January’s external trade and industrial production index figures beating estimates by a substantial margin. Although shipments abroad pulled back a mild 0.8% in February, analysts at RHB Research Institute and MIDF Research said this may be due to the Lunar New Year break and remained optimistic on the trade outlook.

“Looking to 2024, there is room for optimism even as the external environment remains highly uncertain,” said Abdul Rasheed. Malaysia’s economic fundamentals will allow it to weather storms such as prolonged high interest rates and escalation of geopolitical events, he said.

The ringgit recouped a loss from earlier Wednesday to trade little changed at 4.7380 against the dollar as of 12:16 p.m. in Kuala Lumpur.

The currency is undervalued and is set to strengthen to 4.50 toward the end of the year, supported by the prospect of Fed rate cuts and a stronger yuan then, Saktiandi Supaat, head of foreign exchange research at Malayan Banking Bhd., said in an interview with Bloomberg Television.

--With assistance from Marcus Wong and Ram Anand.

(Adds central bank’s view on inflation in the eighth paragraph, ringgit level and Maybank analyst’s comment starting in the 17th paragraph)

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