OVERVIEW

Federal fund rate unchanged. The FOMC voted to maintain the Federal Fund Rate range at 1.00%- 1.25% at its seventh monetary policy meeting for 2017. This comes after the FOMC raised rates in June by 25bp.

Monetary policy statement. The press release noted that economic activity has increased at a “solid rate” despite notwithstanding hurricane-related factors. The statement conspicuously acknowledged “soft” inflation for non-food and fuel categories. On the balance, this implies the Fed’s more sanguine view of economic activity, hence reinforcing expectation of an upcoming rate hike (possibly in December) despite soft inflation.

OPR trajectory likely unchanged on US interest rates. We reiterate our stand that the Fed’s moves are not likely to significantly influence the OPR trajectory. However, with the Ministry of Finance recently anticipating elevated economic growth for 2018 at the 5.0-5.5% range, we believe BNM may gradually tilt its monetary stance towards tightening in 2018.

Ringgit to see some mild depreciation headwinds. The ringgit may see some depreciation pressure on each confirmation of the Fed’s hawkishness in both today’s November meeting and the subsequent December meeting with policy uncertainties preventing the USDMYR pair from being fully priced in. However, for now, we are maintaining our base case scenario of the USDMYR hitting 4.15 by the end of the year.

Source: Kenanga Research - 2 Nov 2017