KUCHING: The US Federal Reserve (US Fed) is expected to inject its weak economy with a quantitative easing (QE) shot following the disappointing report on job growth last month which paved the way for it to announce the impending purchase of more Treasury or government-backed mortgage.
“This injection will be the third since March 2009 intended to lower long-term interest rates and subsequently stimulate economic activity,” said MIDF Amanah Investment Bank Bhd analyst, Anthony Dass.
Dass believed that the US Fed’s action had signalled a stronger commitment than it had sent before to reduce unemployment following this ‘open-ended’ programme.
This was expected to boost the country’s ‘beleaguered housing market, spur broader spending and investment which in turn would boost the economic growth and improve the labour market’.
The actions taken by the US Fed would more or less have an impact on the Malaysian economy as well, with QE initiatives in the past having strengthened and positively impacted the nation.
“We did a quick analysis on the impact of QE1 and QE2 with respect to several key economic indicators for Malaysia.
“We found that the impact from QE2 was more significant than QE1, which is not surprising.
“The reason being that during the period of QE1, from March to October 2009, both the global and Malaysian economic growth contracted by 0.7 per cent year-on-year (y-o-y) and 1.6 per cent y-o-y respectively,” Dass explained.
On the other hand, during the period of QE2 which was from November 2010 to June 2011, the global growth expanded by 5.3 per cent and 3.9 per cent respectively in 2010 and 2011.
In the case of the Malaysian economy, it grew by 7.2 per cent and 5.1 per cent respectively in both years.
On QE3, Dass said, “Since the QE3 is expected to inject US$85 billion until end-2014, we believe there will be some impact to several key economic indicators.”
“First, we assume the QE3 will be in operation for six months until February 2013. This would mean an estimated total inject of US$420 billion.”
Using QE2 as his benchmark, the analyst expected the global economy to grow by 3.4 per cent this year an 4.1 per cent in 2013, while the Malaysian economy was expected to expand by 5.3 per cent this year and 5.8 per cent in 2013.
Computing the elasticity of several key economic indicators with respect to the US Fed total outright holdings, Dass found several key economic variables exhibiting positive elasticity.
Firstly, headline inflation, core-inflation, and food prices would increase as a result of higher global commodities prices as well as higher crude oil prices.
Crude oil and soya bean prices were then expected to increase partly due to speculation.
Also the ringgit was expected to strengthen against the US dollar as a result of capital in flow.
“The Kuala Lumpur Composite Index and Malaysian Government Securities will also benefit from the capital inflow while exports will benefit from firmer commodity prices. Money supply will benefit from the increase in inflow of capital.
“Given this scenario, we expect the elasticity of these set of economic indicators would be close to QE2 levels in the QE3 period,” added Dass.