Fed declares a 75 basis point rate increase
As expected! The Federal Reserve once more announced a 75 basis point hike in the federal benchmark interest rate on July 28 (Malaysian time). The Fed will increase interest rates a total of four times in 2022 and has already done so twice this year, each time by 75 basis points.
In keeping with Bank Negara Malaysia’s overnight policy rate (OPR) of 2.25 percent, the Fed’s current federal base rate is in the target range of 2.25 percent to 2.50 percent. The Fed rate and Bank Negara rate stay unchanged, which will cause the ringgit to lose value as it becomes more globally competitive and more appealing to the US dollar.
The ringgit has reportedly risen to a level of 4.4530 against the US dollar and 3.2197 against the Singapore dollar, according to data from Bank Negara.
How will Malaysia be impacted by the Fed’s ongoing interest rate hikes? Here is a look at how rising U.S. interest rates are affecting developing markets.
1. Ringgit value decline
Rising interest rates are an indication of currency strength because foreign investors will be drawn to US dollar assets. As a result, depositors will convert their money from other nations with lower interest rates into US dollars and transfer it to US local banks. the rate of exchange upward. The ringgit has declined significantly in value relative to the US dollar as a result of the Federal Reserve’s three interest rate increases; currently, one US dollar is worth approximately 4 ringgit 46 sen.
2. The exodus of foreign funds from developing markets
Increased interest rates in the US led to a significant outflow of money from emerging markets to the US. This suggests that if interest rates rise in the US, the Malaysian stock market will experience an oversold condition. The stock market in my own nation has similarly been ranging between 1410 and 1470 since the Fed increased interest rates.
3. Put more pressure on the nation to repay its debt.
Generally speaking, increases in US interest rates will result in a boom in the US currency, which will put countries who fail on US dollar loans under a lot of pressure to repay their debt.
4. Costs associated with imports rise.
The ringgit and other Asian currencies may start another devaluation war due to the strengthening US dollar. Businesses who buy raw materials and production equipment in US dollars will have more difficulties running their businesses. Additionally, the increase in the cost of foreign gasoline could result in price increases for domestic fuel, electricity, natural gas, and even name-brand luggage and designer clothing.
5. Gold is losing value as commodities decline in price.
US dollar-denominated commodities, such as raw materials, minerals, metals, and energy, will be impacted by the US dollar’s sharp climb.
