Some analysts predict that the Federal Reserve will raise interest rates 4 more times in the second half of 2022, having already raised rates 2 times this year, with the next interest rate resolution falling on 14 and 15 June.
The Fed raises interest rates frequently, so what will this mean for Malaysia? Here we take a look at the impact of the US interest rate hike on emerging markets.
1. RM devaluation
A rise in interest rates is a sign of a stronger currency, and global funds will be attracted to move towards US dollar assets, meaning that depositors will swap their money from other countries with lower interest rates to US dollars and move to local banks in the US, which will increase demand for US dollars and push up the exchange rate. The Fed’s two interest rate hikes have already caused the Malaysian dollar to depreciate significantly against the US dollar, with the lowest exchange rate of RM4.40 per US dollar.
2. Foreign investment out of emerging markets
Higher interest rates in the US have triggered a massive withdrawal of funds that were originally parked in emerging markets to the US. This means that a rise in US interest rates will result in an oversold Malaysian stock market. Our stock market also retreated to around 1,550 points following the Fed’s interest rate hike.
3. Increased pressure on national debt servicing
Generally speaking, a rise in US interest rates will cause the US dollar to rise sharply, which will result in countries that default on their US dollar bonds being under heavy pressure to service their debts.
4. Imported goods become more expensive
Asian currencies, including the ringgit, are likely to be in a race to the bottom as the US dollar strengthens! Companies that buy their production equipment and raw materials in US dollars will face greater challenges in their operations. The rise in international fuel prices may also drive up the prices of domestic consumption of oil, electricity, gas, and even designer bags and high quality clothing.
5. Commodities are falling and gold is becoming less valuable
The strong rise in the US dollar will hit commodities denominated in the US dollar, including raw materials, minerals, metals and energy will be under pressure, and market capital may shift from gold, which is a safe-haven, to the US dollar, making gold prices bearish.
