KUALA LUMPUR: The US Federal Reserve’s less hawkish signal and tapering of its planned rate hikes will provide more room for Bank Negara Malaysia to maintain its accommodative stance on its monetary policy, said Kenanga Research.
The firm said the central bank would likely maintain its overnight policy rate at 3.25 per cent next year.
“With inflation expected to remain benign in 2019 on the back of subdued global oil prices and an expected slower economic growth next year, there is a likelihood that Bank Negara would err on a rate cut.
“However, the probability of that happening is relatively low for now. Nonetheless, as always, we expect Bank Negara’s monetary policy stance to give priority to support economic growth and ensuring price stability. Judging by the experience during the Asian financial crisis two decades ago, raising interest rates for the sole purpose of defending the currency is unlikely.
“At this juncture, barring the unforeseen, we expect Bank Negara to maintain its accommodative monetary stance and maintain the overnight policy rate at 3.25 per cent in 2019,” it said in a note today.
Kenanga Research expects the ringgit and emerging market currencies to be subjected to less pressure due to less than hawkish US Fed tone.
“As the Fed appears to convey a less hawkish tone, it would cast a pall on a strong US dollar call in 2019. This may also mean cutting the slack on downward pressure of the emerging market currencies.
“Though we expect the downward pressure on the ringgit would continue to spill over in 2019 due to uncertainty in the global economy, it would somewhat be less.
“Hence, we maintain our US dollar-ringgit year-end forecast of 4.15 though we expect it to continue to test the 4.20 level in the near term. On the back of strong fundamentals and a more stable domestic economic outlook we project the pair to settle at 4.10 by end of 2019,” it added.
On Wednesday, as expected, the Fed’s Federal Open Market Committee (FOMC) decided to hike its short-term fed fund rate by 25 basis points (bps) to between 2.25 per cent and 2.50 per cent.
It was the fourth rate hike this year and the ninth since the Fed started raising rates from effectively zero in December 2015. The last rate hike was on September 26. All 10 voting members of the FOMC voted in favour of the decision.
Kenanga Research highlighted that markets were currently focused on the fact that the Fed in the face of mounting pressure from President Donald Trump and the market did not back off hiking the interest rate or expect further rate increases.
“However, the updated economic projections may offer some dovish hope,” it added.