OVERVIEW

● As widely anticipated, the Federal Reserve has raised its key short-term rate by a 25 basis points to a range of 2.00% to 2.25% for the third time this year. This is the eighth increase since the Fed began normalizing policy in December 2015. Almost immediately President Donald Trump said he was upset by the Fed’s rate hike, at a press conference, adding that “I’m worried about the fact they like seem to like raising interest rates”.

● The Fed signals strong support for another hike in December and three in 2019. Twelve out of 16 Fed officials see another hike in December (up from 8). Median forecasts released by the Fed’s policymakers pointed to one more rate rise this year, followed by three increases in 2019 and another in 2020 - in line with previous expectations. The Fed dropped previous assurances that policy is “accommodative” as it removes the economic stimulus it put in place during the crisis.

● Ignores trade worries. As the Fed is staying on course for tighter policy backed by unemployment rate heading toward multi-decade lows, accelerating wage growth (fastest in nine years), and estimates point to annualised 3Q18 growth exceeding 4.0%, it made no reference to trade worries in its post-meeting statement. Instead, it gave a bullish update on the economy, which it expects to grow by more than 3.0% this year, adding that activity growth and job gains have been strong, as have spending and corporate investment. Risks to the outlook remain “roughly balanced,” it said.

● BNM to stay pat. Meanwhile, in the context of the Malaysian monetary policy, we still maintain our concern of the post-election sharp decline in investment and outflows of capital that is adversely affecting the financial market and economic growth. Unlike its regional peers, namely Indonesia and the Philippines, which are signalling a further rate hike to defend their currencies and massive outflows of capital, we expect Malaysia to be more deliberate in its decision and to monitor closely the global and domestic economic developments. To ensure capital market stability and ample liquidity as well as to support growth, we still expect BNM’s monetary policy to lean towards an accommodative stance and hold the overnight policy rate at 3.25% for the year.

● Downward pressure on Ringgit limited, for now. The Fed stronger signal to raise rates may assert more downward pressure on EM currencies, including the Ringgit. However, the Ringgit direction is largely dependent on sentiment though fundamentally it remains relatively well supported. Hence, this would likely limit the downside on the Ringgit though we still expect the ringgit to remain weak against major currencies especially the USD. Against the US dollar we expect the ringgit to test the 4.15 level in the near term. We still maintain our USDMYR year-end target of 4.05.

Source: Kenanga Research - 27 Sept 2018