BANK Negara Malaysia (BNM) has underscored the importance of structural reforms and comprehensive policies to stabilise the ringgit, arguing that over-reliance on international reserves to manage currency fluctuations is not a sustainable long-term strategy.
In its Annual Report 2024, released today, BNM stated that the movements of the ringgit—like those of most currencies—are driven by both short-term market fluctuations and the long-term economic fundamentals of Malaysia.
The central bank noted that the response to currency movements must be tailored to the underlying causes of exchange rate shifts. It added that a multi-faceted approach to policy, using a range of tools, is necessary to ensure efficacy while avoiding overburdening any single mechanism.
While foreign exchange interventions (FXI) are useful in calming short-term volatility caused by global shocks, BNM cautioned that relying too heavily on international reserves to counteract long-term, fundamental forces would be counterproductive.
“Relying excessively on foreign reserves to manage long-term drivers of currency movements may not be the appropriate course of action,” the report stated.
Instead, the central bank advocates for prioritising structural reforms and policies that can strengthen Malaysia's economic resilience. These include enhancing the financial market infrastructure to withstand the impacts of currency fluctuations, improving productivity, and boosting competitiveness.
These reforms, BNM argued, are essential for promoting sustainable economic growth and ensuring fiscal sustainability.
In line with this, BNM has continued to work closely with the government to maintain confidence in the ringgit and promote stable conditions for both households and businesses.
The central bank is actively supporting the effective implementation of structural reforms, engaging with the global investment community to highlight Malaysia’s progress, and leveraging its policy toolkit to foster favourable domestic financial conditions.
BNM also stressed that a collaborative effort from policymakers, businesses, and society is key to maximising the potential of these reforms. "A unified approach is crucial to unlocking sustainable growth and ensuring the long-term resilience and appreciation of the ringgit," the report added.
Adapting to Rising Supply Shocks: BNM’s Strategy for Economic Stability
In its report, BNM also highlighted the growing complexity of supply-side shocks—disruptions that increase production costs or limit output, often due to geopolitical tensions, natural disasters, or policy shifts.
These shocks are expected to increase in scale, frequency, and duration, driven by factors such as geopolitical conflict, efforts to reduce dependence on global supply chains, demographic changes, and the challenges posed by climate change.
BNM urged policymakers to develop strategies capable of responding effectively to these evolving supply shocks.
"Supply shocks are likely to increase in magnitude, frequency, and duration," the report noted, citing the need for timely and well-informed policy responses.
The central bank stressed that monetary policy should not function in isolation when responding to supply-side shocks, particularly those originating from government policies.
"Strong coordination between fiscal and monetary policy is essential to ensure a more precise and effective response," BNM stated, underlining the need for a cohesive approach to managing economic disruptions.
Clear and transparent communication is also vital during times of economic reform, according to BNM.
The bank noted that clear, timely, and accurate communication about the objectives of monetary policy helps shape public and market expectations, especially during periods of economic transition.
“Consistent and authoritative messaging can reduce uncertainty, limit overreaction from households and businesses, and help keep inflation expectations in check,” BNM explained.
The central bank also emphasised the importance of a systematic approach to managing uncertainty, particularly in the face of frequent and large-scale supply shocks.
This approach, BNM noted, strengthens transparency and credibility, ultimately supporting the central bank’s goal of maintaining price stability and sustainable growth.
Moreover, BNM outlined a structured framework for understanding and responding to supply shocks, ensuring that monetary policy decisions are based on accurate information and contextual analysis.
"Such an approach helps maintain price stability in the medium term without placing undue pressure on economic activity," BNM concluded, reaffirming its commitment to navigating complex challenges effectively and fostering public trust.
By adopting this holistic and well-coordinated approach, BNM aims to ensure the resilience of the Malaysian economy and promote long-term stability, which will, in turn, support sustainable growth and the continued strength of the ringgit. – March 24, 2025
