Powell in his opening remarks at his press conference pointed out that the central bank remains strongly committed to its two per cent inflation target. — Reuters photo
KUCHING: Researchers at Kenanga Investment Bank Bhd (Kenanga Research) continue to believe that Bank Negara Malaysia (BNM) will likely lean towards a rate cut for the Overnight Policy Rate in its next review, in spite of the US Federal Reserve maintaining its federal funds rate.
As widely expected, the US Federal Open Market Committee (FOMC) kept its federal funds rate target range at 1.50 to 1.75 per cent on Wednesday, signalling its intention to keep them on hold throughout 2020 amid a solid economy.
The move to stand pat comes after three rate cuts earlier this year. The last rate increase was a year ago.
“The FOMC reiterated in its statement that economic activity has been rising at a ‘moderate’ rate with ‘solid’ job gains,” Kenanga Research said in a sector outlook yesterday.
“Officials seem to be more confident that their policy would remain supportive of growth in coming years even with the US and China yet to reach a trade deal, Brexit’s future in question and a lacklustre global economic outlook.”
The Federal Reserve in its first unanimous vote since May said it will continue to monitor the implications of data for the economic outlook “including global developments and muted inflation pressures.”
It also removed an earlier reference to “uncertainties” remaining about the outlook.”
Although the Fed has made it clear that there would be no further rate cut next year, Kenanga Research still believe that BNM may still need to cut interest rates though the probability for a bigger cut would be less.
“Given the prevalent state of uncertainty in both the global and domestic economy, the general view is that BNM monetary policy bias would still lean towards a rate cut,” it opined.
“The low inflationary environment and a slowing economy would provide ample room and policy justification for BNM to embark on at least one rate cut in the near term, possibly in the 1Q20, bringing the overnight policy rate to 2.75 per cent from the current three per cent.”
The FOMC dot plot showed a divergence among Fed officials as to whether rates will stay put or rise in 2020, the research firm said.
Eight FOMC participants expect the federal funds rate to stay where it is next year, while six of them project a rate between two and 2.25 per cent.
As many Fed officials had been indicating in recent comments, they see the current stance of monetary policy as “appropriate to support sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric two per cent objective”.
Meanwhile, Fed Chairman Jerome Powell, in his opening remarks at his press conference, points out that the central bank remains strongly committed to its two per cent inflation target.
The chairman said he would want to see a “significant” and “persistent” inflation rise before he would raise rates to clamp down on prices.
“For now, the Fed’s benchmark interest rate “is appropriate and will remain appropriate” until there is a change in the outlook, he said.
“In order to move rates up, I would want to see inflation that is persistent and that is significant,” Powell told reporters.