Steep weakness of the ringgit the cause of Malaysia’s high inflation

Jameel Ahmad is the Vice President of Corporate Development and Market Research at FXTM

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While higher oil prices are being seen as the catalyst behind the significant spike in inflation, the price of oil has resumed its weakness in international markets and this should feed through to local price pressures if higher oil prices are indeed the reason behind the stronger price pressures that the local economy is encountering at the moment.

I still stand behind my comments late last year that the acceleration in Ringgit weakness since November 2016 and its prolonged weakness since then was going to present inflation risks to the Malaysian economy, which have very well held true as we conclude the opening quarter of 2017.

It would be a positive if there is no evidence of price pressures spreading more broadly in the economy, as this would somewhat limit the pressure and emerging expectations on the Bank Negara when it comes to possibly having to raise interest rates higher in line with inflation.

It is however important to point out that there are minimal expectations as it currently stands for higher interest rates in Malaysia, regardless of the recent bounce higher in inflation and the lower borrowing rates are seen as supporting the domestic economy.

There are still a lot of challenges to the global economy that is impacting sentiment including prolonged weakness in the price of oil, higher interest rates in the United States and ongoing concerns over the emerging markets entering a period of weaker economic growth.

While growth in Malaysia is still higher than the majority of economies in the developed world, its pace of growth has slowed down in recent times and this has likely contributed in some way to reduced hiring in businesses.

 

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