26 May 2014

Interest Rate Parity - MYR vs SGD

It's noted that Malaysia Ringgit always enjoy higher interest rate against Singapore Dollar in long run. Part of the reasons is that Singapore government prefer to use monetary policy to control the inflation. According to interest rate parity theory, MYR will depreciate against SGD in long run in order to remain in the "balance" for the cash flow in between two countries.

And you would notice that normally for currencies that enjoy good credit ratings, they may be required for lower interest rate against those currencies that have lower credit ratings. This is always based on Supply-Demand issue.

But another theory state that as long as the country that have higher interest rate can attract more foreign direct investment and enjoy a better GDP growth, then this currency could play a catch up against a country which suffered from economy recession and would have to depreciate it against other currencies in order to boost up the economy.

Currently RM/SGD is around 2.59 - 2.60. So it would be wise if we liquidate SGD to purchase a RM denominated properties / securities only if selecting a good purchase. After all, I noticed that HDB could enjoy around 5% - 7% compound annual growth rate for the past 40 years. So, it would be wise if we could achieve at least 10% compound annual growth rate for a MYR denominated investment to offset the depreciation of RM against SGD. Or we may be praying that Malaysia could have a better GDP growth against Singapore in long run which I believe it may be achieved, provided Malaysia could also transform to an economy that relies on high technology instead of intensive labor cost.

1 comment:

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