● The Federal Reserve (Fed) has expectedly cut its key overnight policy rate target range by 25 basis points to 1.50%-1.75%, its third rate cut since July. It also signalled it would refrain from further reductions unless the economy slowed sharply.

● Hawkish cut. Adding a hawkish note to the Federal Open Market Committee’s decision on Wednesday, James Bullard of the St Louis Fed did not dissent in favour of an even steeper cut, as he had in September. Meanwhile, Esther George of the Kansas City Fed and Eric Rosengren of the Boston Fed dissented, preferring to leave rates unchanged as they had at the Fed’s July and September meetings,

● Pause signal ahead. The statement indicated that the Fed is balanced on the direction they would go next, pointing that it would be on pause for rate cuts if there are signs that the economy is weakening sharply. The committee's statement removes that phrase that it will "act as appropriate" to sustain economic expansion, perhaps suggesting that it does not plan a further cut in December. Instead "the Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate." Another change in language describes job gains as "solid" rather than "strong."

● Lowers probability for BNM to cut the OPR. As the Fed’s next move appear to be clearer and signalled no further cuts, we expect it would also lower the probability and the likelihood for Bank Negara Malaysia (BNM) to cut interest rates. However, we are still cautious on the growth outlook going forward. Although there seemed to be some positive signal that the US-China trade deal would be concluded soon, the impact of higher tariff would still weigh on global trade and growth going forward. It is still hard to foresee any signs that would trigger a speedy and sustainable turnaround in global growth any time soon. This would mean that Malaysia’s growth drivers, manufacturing and exports, would continue to be weak for at least another 6-12 months. However, the recent Federal Budget for 2020 showed that the Government remains committed to spend, albeit more wisely in spite of budget constraints, to stimulate the economy. This would help support the economy and lessen the need to depend on the monetary policy. As this lowers the probability that BNM would cut the overnight policy rate (OPR), we expect BNM to hold the OPR at 3.00% at its sixth and last Monetary Policy Committee meeting for the year on November 5th.

Source: Kenanga Research - 31 Oct 2019