A man walks past the Federal Reserve Bank in Washington. — Reuters photo
KUCHING: The possibility of the United States’ (US) Federal Open Market Committee (FOMC) keeping its fed rate unchanged at the upcoming September 19 and 20 meeting led analysts at Kenanga Investment Bank Bhd (Kenanga Research) to predict an unchanged Overnight Policy Rate (OPR) for Malaysia.
This follows the FOMC’s last meeting in July 25 and 26 where it retained the Fed Fund rates at one to 1.25 per cent.
Kenanga Researh observed that the FOMC last raised the Fed Fund Rate during its 13-14 June meeting by 25 basis points (bp).
The Federal Fund Futures implied probability for a September rate hike is virtually nil as at September 5.
This implied probability for a rate hike is likewise at sub-30 levels for the rest of 2017.
“Despite comments from various Fed policymakers maintaining their median three rate hike trajectory, we are seeing increasing caution particularly from their meeting minutes and their comments to the press.
“This reinforces our view that a rate hike will not occur in September, or indeed, the rest of the year,” it said in a report yesterday.
“Strategically, a delayed rate hike averts the risk of removing accommodation too soon before wage growth recovers while leaving up the possibility of a rate hike in December, if inflation starts picking up subsequently.”
Kenanga Research’s base case scenario puts no further rate hikes for the rest of 2017.
However, it did not discount further improvements in labour market and productivity growth during 4Q17 to help nudge up Fed’s inflation expectation.
“With rate hikes typically occurring at the end of each quarter in the absence for a pressing need for rate changes, any decisions to raise interest rates for the third time this year will likely take place only in December; this suggests that the odds for a November rate hike are relatively remote, at best,” it said.
Overall, Kenanga Research said the Fed Fund rate trajectory is likely to play a relatively small role in Malaysia’s OPR trajectory which will instead be influenced by domestic growth and inflation.
While Malaysia saw higher-than-expected GDP growth of 5.8 per cent for 2Q17 and a slight uptick in broader price trends, as measured by core inflation, the research firm believed that this would not significantly change the fundamentals of Malaysia’s OPR trajectory moving forward.
“Indeed, despite slightly higher core inflation of 2.6 per cent in July, it is noteworthy that inflation remains manageable overall and historically unimpressive, at least relative to 1Q16 which saw core inflation in excess of 3.5 per cent,
“Moreover, despite signs of improved 2Q17 GDP numbers, it is worth noting that domestic demand expanded by a weaker 5.7 per cent, suggesting that a likewise more cautious approach to the OPR will be warranted.”
Kenanga Research said in the short term, it believed that regional tensions – largely stemming from North Korea’s missile programme – may be a damper on investors’ sentiments.
“On the balance, with the US dollar possibly weakening against other major currency and the Ringgit’s strength slightly tempered by these tensions, we expect a greater degree of currency uncertainties in the short-to-medium term.
“This may be somewhat balanced by a more active open market operations by Bank Negara (BNM) in attempting to stem these volatilities. For now, we expect the ringgit to be biased on the downside and trade close to the USDMYR 4.25-4.30 range, possibly testing the 4.30 levels on escalation of regional tensions.
“Other longer term sources of volatility may arise from BNM’s backlash against the introduction of ringgit futures at the Singapore Exchange, potentially leading to similar, albeit less drastic, volatilities which we observed during BNM’s recent attempt in clamping on non-deliverable forwards late-2016.”