Kenanga Research expects Bank Negara to maintain the overnight policy rate at 3% in 2025. — Bloomberg
PETALING JAYA: Bank Negara’s international reserves fell to a five-month low, following a depletion in foreign currency reserves by end-December 2024.
In a note, Kenanga Research said foreign currency reserves dropped by US$1.7bil, along with marginal reductions in special drawing rights and other reserve assets.
Overall, Bank Negara’s international reserves fell by US$2.1bil or 1.8% month-on-month (m-o-m), reaching US$116.2bil as of Dec 31, 2024.
“Despite the decline, reserve adequacy indicators improved, with import coverage rose to five months, and reserves also fully covered the total short-term external debt (one time), aided by exchange rate revaluation.”
In ringgit terms, reserves surged to RM520.2bil or 7% m-o-m in December.
For full-year 2024, the central bank’s international reserves grew by US$2.7bil in 2024, rebounding from a US$1.2bil contraction in 2023.
On the ringgit, Kenanga Research said it depreciated for the third consecutive month in December, with the monthly average settling at RM4.46 against US dollar.
This was the worst quarter in nearly a decade.
External headwinds drove the decline, including US president-elect Donald Trump’s tariff threats, geopolitical uncertainties, the collapse of the French government, and political turmoil in South Korea.
This was compounded by expectations of monetary policy divergence between the US Federal Reserve (Fed) and G10 central banks, the Bank of Japan’s cautious stance, a deteriorating eurozone growth outlook, and political instability in Canada.
The yield differential between the 10-year Malaysian Government Securities and US Treasury widened further to an average of 58.8 basis points, intensifying pressure on the ringgit.
Meanwhile, Kenanga Research expects Bank Negara to maintain the overnight policy rate at 3% in 2025, balancing domestic growth risks with inflationary pressures.
However, heightened global uncertainties and potential upside risks from wage-price pass-through warrant close monitoring.
Keeping a steady policy hand would support fiscal consolidation efforts while safeguarding price stability, the research house stated.
It also forecast that the ringgit would hit RM4.45 against the US dollar by year-end, pointing out that the ringgit is set for a volatile 2025.
“We expect weakness in the first half of 2025 (1H25) at RM4.50 to 4.60 per US dollar, driven by Trump’s US dollar-supportive policies, followed by a modest recovery to RM4.40 to RM4.50 per US dollar in 2H25 as the Fed potentially cuts more than market anticipates.
“While the Fed’s dot plot signals one to two rate cuts, we foresee two to three cuts amid further economic softening, with additional easing likely in early 2H25, weighing on the US dollar.
“Malaysia’s fiscal consolidation and stable monetary policy could mitigate regional pressures, supporting relative outperformance.”
