Fed decision unlikely to affect OPR, ringgit

PETALING JAYA: The US Federal Reserve’s decision to maintain the federal funds rate at a range of 1.00%-1.25% is unlikely to affect Malaysia’s Overnight Policy Rate (OPR) with a short-term impact on the ringgit.
“While we recognise that external policy moves may prompt market stabilisation measures, on the part of Bank Negara Malaysia (BNM), we believe that this will not significantly influence the OPR trajectory. Instead, the OPR will likely be influenced by prevailing domestic inflation and growth considerations,” Kenanga Research said in its report today.
Despite an uptick in August inflation to 3.7% (July 3.2%) from supply-side factors, it expects inflation to remain manageable at the prevailing 3% OPR. At the same time, it opined that the current OPR is likewise accommodative of Malaysia’s growth agenda.
According to Kenanga Research, the Fed’s mildly hawkish tone suggests that the ringgit may lose some ground against the US dollar in the near term and expects the immediate impact to be somewhat muted, as it doubts that the September meeting was significant in quelling speculations of a pause in monetary policy tightening.
“Nevertheless, expect the ringgit to be tested above the USD/MYR 4.20 mark in the short term but likely to bounce back to our year-end USD/MYR target of 4.15 as markets settle. However, in the broader context of the ringgit against its major trading partners, we expect the ringgit to remain broadly stable, albeit losing some ground against the euro on a more hawkish ECB (European Central Bank) overtone of late.
“Relative to other advanced market economies though, the strength of the ringgit will hinge on the escalation of tensions (or the lack thereof) arising from US-North Korea sabre-rattling, possibly triggering a risk-off mode for the Asian region as a whole,” it said.
The Fed’s Federal Open Market Committee (FOMC) voted at its sixth monetary policy meeting for 2017 to keep the federal funds rate range at 1.00%-1.25%, following the 25-basis-point increase in June. It continues to see a total of three rate increases for 2017 and in 2018 with a more sanguine economic outlook factored in.
Note that the FOMC revised its inflation targets and will start shrinking the Fed’s US$4.5 trillion (RM19 trillion) balance sheet by October, in line with its July statement of portfolio normalisation.
“With the October-November meeting traditionally associated with lower odds of policy rate changes, all eyes are now centred on the possibility of a December rate hike. The implied probability for a December rate hike have since edged above the 50% threshold to 63.8% as at Sept 20; the probability has been consistently under the 50% mark from mid-July to mid-September,” said Kenanga Research.
It retained its house view for two rate increases this year, despite the FOMC’s September statement adding more fuel to the projections of a three rate hikes scenario. This is because it is not seeing any pickup in wage growth in the horizon despite labour market strength and a more optimistic economic outlook.
“However, with the possibility of economic growth progressing at a faster clip than even the revised estimates of 2.4% and significant pass through effect of improved economy to wage growth, we can see a case for a third rate hike in December,” it said.
It said the odds for a third rate hike are only modest, at best, based on the belief that a delayed increase will be more prudent in light of US domestic uncertainties and the risk of removing accommodation prior to wage growth picking up.