Question

(b) Explain how the following events affect the demand of Ringgit Malaysia (RM) and its value. (i) Bank Negara Malaysia targets a lower interest rates vis-à-vis regional countries. (ii) There is a sudden interest in Malaysian property market among foreigners. (iii) More international students coming to study in Malaysia.

Answer 1

1) Bank Negara Malaysia targets a lower interest rate vis-a-vis regional countries.

Cut in interest rates in any country tend to make its currency lose value. Thus if Malaysian Bank Negara targets a lower interest rate, the value of Ringgit Malaysia will fall. That is because lower interest rates mean there is less money to be made byinvesting in that country's assets, since they are yielding less inerest. When Bank Negara cuts interest rate, consumers usually earn less interest on their savings. Banks will typically lower rates paid on cash held in bank certificates of deposits, money market accounts and regular savings accounts. The rate cut usuallytakes a few weeks to be refleced in bank rates.

When there is a sudden interest in Malaysian property market among foreigners, the home or property you want to buy is supply while the currencies are the demand in supply - demand relationship. When suply decreases due to overhelming interest and the demand for currency goes up i.e. the currency value increases. That means the value of Ringgit Malaysia will increase.

When more international students come to Malaysia, your home currency weakens against the Ringgit Malaysia (RM). Currency appreciation usually reduces inflation because impoorts become cheaper and the lower prices lead to lower inflation. It makes imports more attractive, causing the demand for local p;roducts to fall. Local companies usually have to cut costs and increase productivity so they can remain competitive.