Fed likely to maintain rate this year, BNM’s OPR may stay pat
KUCHING: With the US’ Federal Reserve likely to retain its federal fund rate range at 0.75 to one per cent, analysts believe Bank Negara Malaysia ( BNM) woudl likely to keep the Overnight Policy Rate (OPR) unchanged.
Kenanga Investment Bank Bhd ( Kenanga Research) believed that the Federal Open Market Committee ( FOMC) is likely to maintain its Federal fund rate range after its decision in March to raise the benchmark rate by 25 basis points ( bps).
“An assessment of the Fed’s key barometers suggests that while jobs market have been advancing steadily, the US economy remains a distance from its inflation target of two per cent. Some Fed officials have been quick to note that this is a target, rather than a ceiling,” it said in a note yesterday.
To note, the FOMC is due to announce their next policy rate decision at the conclusion of their May 3 meeting.
Based on the Federal Fund Futures as at April 17, Kenanga Research said there was an implied 13.3 per cent odds that the policy rates will be raised at the conclusion of the May meeting though the implied probability for rates to move above the 0.75 to one per cent bracket is 50.2 per cent in the June meeting.
This came amongst policy uncertainties cloud outlook as despite President Donald Trump’s ambitious plans for overarching fiscal reforms, there were increasing signs that these plans may well be mired in legislative gridlock.
“His failure to push through the repeal of Obama’s Affordable Care Health amid divisions in his Republican Party and strong partisanship suggests that Trump’s fiscal plan may have to struggle with the fiscal conservatives within his party and the moderates,” it added.
“His significant U- turns in recent weeks – most notably, support of NATO, declining to label China as a currency manipulator and his warming up to Fed Chair, Janet Yellen – suggests some moderation from some of his campaign stance.
“This, in turn, suggests that paring down expectations of his pre- election promises may be prudent.”
The uncertainties surrounding t h e Trump ’ s pl a n ne d expansionary fiscal push adds another unknown variable into the Fed’s policymaking.
With some wind taken off the sails of the reflation trade amid partisan politics and Trump’s failure to mobilise both moderate and fiscal conservatives among the Republican camp, Kenanga Research said it was uncertain if a more cautious approach to Fed’s tightening monetary policy in the event that Trump’s fiscal push results in a sharp correction in the reflation trade which was observed post elections.
“On the flip side, a modest advancementofpresidentTrump’s fiscal agenda may warrant a faster than expected step-up of Fed’s monetary tightening.
“Thus far, policymakers have broadly claimed that interest rates will be predicated in the prevailing economic situation rather than “impending policy”, we continue to believe that the ongoing developments on the fiscal sphere – whether sentiment or policy- driven – will hold significant sway on the Fed’s barometers, hence ultimately influencing interest rate decision.”
On this point, the firm believed that the OPR would likely stay pat with inflation in focus.
“Given improving growth prospects, rising inf lationary trend, and to a lesser extent, a relatively more stable f low of portfolio capital, we believe that the odds for Bank Negara Malaysia to cut the overnight policy rate has greatly receded.
“At the same time, however, we do not see a compelling justification for a rate rise despite the expectation that the CPI would surpass four per cent this year from last year’s average of 2.1 per cent.
“This is especially so, given relatively stable demand and general price trends. However, we do note that this may be a starting point for a mild tightening bias especially when demand-induced inflation starts kicking in when aggregate demand strengthens though the probability remains low.”
Wit h President Trump suggesting that the US dollar may be too strong, Kenanga Research believed that there may be some room for the dollar to further weaken somewhat in the coming months.
This, in turn, may lend some strength to the ringgit in the coming months, translating into some upside for the ringgit, possibly testing the psychological RM4.40 per US dollar resistance level for the ringgit.
“For now, our US dollar-ringgit forecast remains at 4.35 for the full year though we believe that the ringgit is likely to trade range bound between RM4.40 to RM4.50 for 1H17, with the possibility of appreciating beyond the US$ 4.40 mark.”