Geopolitical tensions may lift re-inflation fears

KUCHING: Researchers with RHB Investment Bank Bhd (RHB Research) maintained its view for reinflation prospects in the first quarter of 2024 (1Q24), with the balance of risks tilted towards the first half (1H) of the year.

Such concerns are led by potential demand-pull drivers, China’s gradual economic recovery, and, more recently, renewed risks surrounding geopolitical tensions.

As of the latest market reading, safe haven flows remain muted, while equity rallies in key markets suggest that market watchers remain undeterred in their risk-taking mode, said acting group chief economist Barnabas Gan.

“Although geopolitical tensions are relative black swan events, we are seeing evidence of supply chain congestions (higher shipping costs in particular), and should it persist and exacerbate, may inject considerable upside bias for global inflation in the foreseeable future,” he said in the analysis.

“The point is that the path towards US inflation of two per cent is still bumpy. Recent US inflation data did not give any comfort; US headline CPI surprised higher against market expectations, thus potentially denting hopes that a rate cut as early as March 2024 will materialise.

“These data support our view that the US policy stance should remain high for longer, at the current perceived peak of 5.25–5.50 per cent, at least

The implications of a reinflation backdrop in 1Q24 profoundly impact rates and foreign exchange. We reiterate our view for the US Fed Funds Rate (FFR) to have peaked at 5.25–5.50 per cent.

Barnabas Gan

for 1H24.”

Specifically, Gan said RHB Research’s inflation indicators are still flashing red.

“We see potential rallies in energy and base metal prices on the back of a global economic growth acceleration in 2024, coupled with higher food prices already seen in key Asean economies.

“The implications of a reinflation backdrop in 1Q24 profoundly impact rates and foreign exchange. We reiterate our view for the US Fed Funds Rate (FFR) to have peaked at 5.25–5.50 per cent.”

The RHB Research economist also maintained his view for two rate cuts to materialise in 2H24 to bring the FFR to 4.75–5.0 per cent by the end of the year.

His view for the ringgit to stay at around 4.6–4.9 per US dollar in 1Q24 remains intact, and FFR normalisation in 2H24 may mean a stronger ringgit at around 4.3–4.6 per US dollar over the same period.