Another rate hike is expected in December, with 3 more to follow next year and 1 increase in 2020

By NG MIN SHEN / Pic By TMR

The ringgit and stock market fell yesterday after the hike in US interest rates, which effectively ended the era of “accommodative” monetary policy amid expectations US economic growth will continue its upward momentum.

As at 5.55pm yesterday, the ringgit was marginally higher at 4.139 against the US dollar, compared to its previous close of 4.141.

The FTSE Bursa Malaysia KLCI (FBM KLCI) declined throughout the day, hitting an intraday low of 1,793.83 before recovering to close 0.08 points lower at 1,798.64.

The US Federal Reserve (Fed) on Wednesday raised interest rates by 25 basis points (bps) to a range of 2% to 2.25%, with plans to continue tightening monetary policy maintained as it forecast the US economy to see three more years of growth.

Another rate hike is expected in December, with three more to follow next year and one in 2020.

This would set the benchmark overnight rate at 3.4%, above the Fed’s estimated “neutral” interest-rate of 3% whereby monetary policy neither expands nor restricts the economy.

“I don’t think the impact on Malaysia is that bad, since the Fed didn’t accelerate the pace of interest-rate hikes,” Oanda Corp head of trading for Asia Pacific Stephen Innes told The Malaysian Reserve.

He said selected Asian currencies such as the Korean won have performed well against the greenback.

“However, I think higher US rates will not weigh favourably for the ringgit, as Bank Negara Malaysia (BNM) will not be matching the Fed rate hike due to the soft GDP print or low inflation,” he said.

Malaysia recorded GDP growth of 4.5% in the second quarter of 2018 (2Q18) and 5.4% in 1Q18, lower than economist estimates.

The central bank also revised downward its GDP projection for the full year to 5% from between 5.5% and 6% previously, on expectations of prolonged supply disruptions in the oil and gas (O&G) and agriculture sectors.

“With the higher oil prices, Malaysia’s terms of trade are good though the sentiment remains unclear due to the fiscal side of the equation. But higher oil prices will go a long way towards shoring up government coffers,” Innes said.

Following the Fed’s move, three Asian countries raised their interest rates as well.

Hong Kong, whose dollar is pegged to the greenback, raised its base rate by 25bps to 2.5% from 2.25%, which resulted in Hong Kong commercial banks raising their benchmark lending rates for the first time in 12 years.

Indonesia pushed interest rates up by 25bps to 5.75% in its fifth rate raise of the year, while the Philippines hiked rates by 50bps to reach 4.5%, after three hikes worth 100bps since May.

Malaysians have little cause to suspect a domestic interest-rate increase though, as these three have country-specific reasons for bumping up lending rates.

“The Hong Kong rate hike was a bit of a surprise, but it could be due to tighter funding conditions in Hong Kong after the People’s Bank of China said they would issue Treasury bills there, which tightens markets.

“Indonesia is raising rates to defend the currency from currency speculators due to the growing deficit, while the Philippines is increasing rates to guard against soaring inflation,” Innes said.

Malaysia’s inflation stood at 0.2% in August, the slowest growth in three and a half years, and the ringgit, while having neared a 10-month low on stock outflows, remains an out-performer among regional currencies despite recent contagion fears in emerging markets (EMs).

“I think the Fed will hold the current course for interest rate hikes through 2018 and 2019, unless there is a surprise uptick in inflation. In that regard, the Fed will remain completely data-dependent,” Innes added.

Notably, the word “accommodative” was missing from the Fed’s statement, which Fed chairman Jerome Powell at his press conference on Wednesday said he did not signal a policy outlook change.

He also spoke of the importance of EMs in propelling US growth, which should reassure investors after the recent contagion fears sparked outflows from Asian markets.

“Way more than half of the growth is outside the US and in EMs, I should say. And so, the performance of the EM economies really matters to us, in carrying out our domestic mandate.

“There are some countries that are undergoing severe stress, a handful of them,
but not most EM countries,” Powell said.