In the upcoming FOMC meeting, we expect the Fed to raise interest rates by 25 basis points (bps) and at the same time turn more hawkish. One of the key areas that we are watching closely is its long-term growth forecast of 1.8% being revised upwards to 1.9%, while the other area of focus is the omission of the word ”accommodative” and what will be the “neutral” level. With the economy doing well and little stress on the trade war and emerging markets, there is little room for the Fed to take a pause from raising rates, which means the “neutral” level could reach 3.50% by 2020.

Translating into Malaysia’s policy rate, we believe the current 3.25% overnight policy rate (OPR) is expected to stay throughout 2018. That means the Bank Negara policy meeting on November 8 will result in no change to the 3.25% OPR rate. However, we have factored in a 25bps rate hike in 2H2019, bringing the “neutral” level to 3.50%.

On a separate note, we foresee Bank Indonesia (BI) raising rates again in the upcoming policy meeting by 25bps to 5.75%. BI has raised its benchmark policy rates by 125bps to 5.25% between June 2018 and August 2018. We also foresee Bangko Sentral ng Pilipinas (BSP) hiking rates by 50bps to 4.00%, also in its upcoming policy meeting. Both the central banks’ meetings are scheduled on September 27.

• In the upcoming FOMC meeting, we expect the Fed to raise interest rates by 25 basis points (bps) and at the same time turn more hawkish. One of the key areas that we are watching closely is its long-term growth forecast. At present, the long-term growth is at 1.8%. Should the Fed revise it upwards to 1.9%, this indicates its growing optimism on the overall economic performance. A stronger economic outlook will allow the Fed to institute a change in its policy stance by dropping the word “accommodative” and move to the next stage of transition of rate hikes.

• We feel the Fed could be different in 2019. It could be reaching to another point of “inflection”. It will be a year where the Fed could be raising rates 2 – 4 times. With the economy doing well and little stress on the trade war and emerging markets, there is little room for the Fed to take a pause from raising rates.

• With the dynamics are likely to change a great deal, the Fed is moving from an environment where the policy is very “accommodative” to one where the policy is “neutral”. Though our base case for 2019 has factored in two rate hikes, the possibility for three hikes cannot be ruled out with another hike in 2020. This would mean that the normalization rate could be around 3.50% instead of 3.00% by 2020.
• Translating into Malaysia’s policy rate, we believe the current 3.25% overnight policy rate (OPR) is expected to stay throughout 2018. That means the Bank Negara policy meeting on November 8 will result in no change to the 3.25% OPR rate. However, we have factored in a 25bps rate hike in 2H2019, bringing the “neutral” level to 3.50%. 
• On a separate note, we foresee Bank Indonesia (BI) raising rates again in the upcoming policy meeting by 25bps to 5.75%. BI has raised its benchmark policy rates by 125bps to 5.25% between June 2018 and August 2018. We also foresee Bangko Sentral ng Pilipinas (BSP) hiking rates by 50bps to 4.00%, also in its upcoming policy meeting. Both the central banks’ meetings are scheduled on September 27.

Source: AmInvest Research - 26 Sept 2018