KUCHING: Researchers expect Bank Negara Malaysia (BNM) to maintain its Overnight Policy Rate (OPR) after the US’ Federal Reserve raised its target range for the federal funds rate (FFR) by 25 basis points in final Federal Open Market Committee (FOMC) meeting of 2016.
On the back of the expected Fed rate hike as well as the persistently weak ringgit, economists at Kenanga Investment Bank Bhd (Kenanga Research) believe the probability of BNM to pursue a second rate cut following a 25 bp cut in July to be rather remote at this juncture.
“Nonetheless, in the absence of guidance of future changes to the OPR, we view that there is still room for another rate cut if there are signs that the prevailing uncertainty in the global economy would deteriorate and drag the domestic economy down sharply,” it said in a note yesterday.
“On the expectation of a slightly better domestic growth outlook next year we expect there would be no change, ceteris paribus, to the OPR in 2017.”
The firm said the Fed Reserve’s interest rate hike was well anticipated as the Fed noted continued labour market strengthening and moderate expansion in economic activty cemented the case for an interest rate hike.
“Due to the long build-up on interest rate expectations, we believe that this moved has already been priced in and will not result in significant market movements in its immediate aftermath,” it said.
“Fed’s interest rate hike will only be the second hike since the 2008 financial crisis – the last interest hike was in December 2015. While core Personal Consumption Expenditure (PCE) inflation remains below the Fed target of two per cent, the hike is consistent with the Fed’s commencement of policy normalisation covered in December 2015, justifies a less accomodative monetary policy given permissive economic condition and outlook.
“Fed sees three hikes for 2017. More germane for the markets are the Fed’s rate outlook for 2017. The latest dot plot implies a median midpoint of 1.1375 per cent, up from September’s projection of 1.125 per cent; along with Fed’s gradualism, this implies three rate hikes of 25bp in 2017. Market expect at least two hikes. The Chair, Janet Yellen, emphasises the revision is “very modest”.
“The economic projections adjustments were mild, taking GDP growth slightly higher, but not exceeding 2.5 per cent over the next three years. Growth projection has been bumped up a notch to 2.1 per cent for 2017 from the two per cent expectation in September – 2016 growth estimates has likewise been revised upwards to 1.9 per cent from 1.8 per cent.”
Meanwhile, Kenanga Research President-elect Donald Trump as a wild card as the lack of clarity on actual fiscal measures passed in 2017 clouds inflation and, by extension, interest rates outlook for 2017.
“Fed Chair, Janet Yellen, notes that “it is far too early to know how these (fiscal) policies will unfold”, further noting other influencing factors. However, in her clearest remark on fiscal policy, Yellen notes that “fiscal policy is not obviously needed to provide stimulus to help us get back to full employment” though she was cautious to note that she is “not trying to provide advice… as to what is the appropriate policy stance”.
“As such, we do not see an immediate case in early 2017 for interest rate hike driven by fiscal policies as Fed officials gain further clarity into the fiscal direction in 2017.
“Despite the President-elect’s prior campaign rhetoric that interest rates have remained unnaturally low, we believe that it is unlikely that Trump will eventually retain central bank independence – indeed, higher interest rates will do little to avert the eventual strengthening of the US dollar, possibly undermining his attempts to bring back America’s offshore manufacturing.”