The Fed raises interest rates frequently, so what impact will this have on Malaysia? Here’s a look at the impact of the U.S. interest rate hike, on emerging markets.
1. Malaysia’s currency depreciates
The interest rate hike is a signal of a stronger currency, which will attract global funds to dollar assets, i.e. savers will convert their money from other countries with lower interest rates to dollars and transfer it to local banks in the U.S. The demand for dollars is seen to increase, which will also push up the exchange rate. The first two interest rate hikes by the Federal Reserve led to a significant depreciation of the Malaysian dollar against the US dollar, with the lowest exchange rate of RM4.42 sen per US dollar.
2. Foreign capital withdrawal from emerging markets
Higher U.S. interest rates have triggered a large amount of capital originally parked in emerging markets to withdraw to the United States. This means that a rise in U.S. interest rates will lead to an oversold Malaysian stock market. Our stock market also retreated to around 1,459 points following the Fed’s rate hike.
3. Increased pressure on national debt service
Generally speaking, a US interest rate hike will lead to a big rise in the US dollar, which will result in heavy pressure on debt servicing for countries that default on their US dollar bonds.
4. Imported goods become more expensive
With a stronger dollar, Asian currencies, including the ringgit, fear a devaluation war! This will make the Purchasing production equipment and raw materials in US dollars will make the company’s operations more challenging. The rise in international oil prices may also drive up domestic consumption of oil, electricity and natural gas, and even the price of designer bags and high-end clothing.
5. Bearish on gold prices
The strong rise of the dollar will lead to a possible shift of market funds from the safe-haven nature of gold to the dollar, which will be bearish for gold prices.
6. National banks will raise interest rates
The Fed’s interest rate hike will force Bank Negara Malaysia to follow suit to retain funds. Borrowers will have to take on higher monthly loans after Bank Negara raises interest rates.
