KUALA LUMPUR: Malaysia’s economic outlook remains intact despite the US Federal Reserve’s (Fed) aggressive rate hike move, said CGS-CIMB.
The Federal Open Market Committee (FOMC) raised the target range for the federal funds rate (FFR) by 50 basis points (bp) at its meeting on May 3-4, 2022, while indicating the possibility of another 50bp hike over its next two meetings.
In a note today, CGS-CIMB said on top of that, the Fed will also likely utilise another policy tool in managing inflation, by reducing its balance sheet and allowing it to decline by US$47.5 billion (US$1=RM4.36) for the months of June to August, and then rise to US$95 billion per month starting in September.
The research house viewed that a sharp rise in the FFR and the outlook for a wider differential against ASEAN’s policy rates may cause greater volatility in the regional foreign exchange (FX) rates, and could prompt the central banks in the region to reconsider the trajectory of their respective monetary policies.
Thus far, it said Fed Funds futures indicate an 83 per cent chance of a 50bp FFR hike on June 15, and a similar chance of a 50bp hike on July 27.
“A stronger probability of a hike in the Fed’s next two meetings could see ongoing weakness in regional currencies.
“Despite this, we believe that central banks will not react in lockstep with the Fed but maintain their respective monetary policy pace,” it said.
CGS-CIMB noted that Malaysia may have greater control over its monetary policy movements versus regional peers as the country is a major beneficiary of high commodity prices, especially with palm oil and natural gas prices on an uptrend.
“Hence, the inflow into its current account can offset the outflow on its financial account. Plus, it has other measures it can utilise to minimise ringgit volatility, including encouraging government-linked companies (GLCs) to repatriate money from abroad, which it had done post the taper tantrum in 2013.
“Bank Negara Malaysia continues to reiterate its cautious stance, contrary to the hawkish Fed, and we believe the central bank focus will continue to be on gross domestic product growth. We maintain our forecast of two 25bp overnight policy rate (OPR) hikes in the second half of 2022 (2H22),” it said.
For Indonesia, CGS-CIMB said the Fed’s policy clarity on FFR should reduce the rupiah’s volatility with further support coming from Indonesia’s favourable current account, fiscal position, as well as planned hikes in its reserve requirement ratio (RRR) in June and September.
“In our opinion, the key uncertainty on Indonesia’s monetary policy remains its inflation outlook, as the government may be adjusting electricity and fuel prices in 2H22.
“However, we believe that the government will be wary of steep adjustments as the Indonesian economy is still recovering from the COVID-19 pandemic,” said the research house.
It added that inflation should not deviate significantly from Bank Indonesia’s (BI) upper range target of four per cent in 2022.
“This would allow BI’s monetary policy to remain accommodative. We reiterate our forecast of a 50bp hike of BI’s 7-Day Reverse Repo Rate (7DRRR) in 2H22F, with an end-2022 rate of 4.00 per cent,” said CGS-CIMB.
Meanwhile, the recent Bank of Thailand’s (BOT) monetary policy has been more sensitive to GDP growth and less to global interest rates than before.
CGS-CIMB said that with the clear slowdown in economic activity in March, owing to the rise in imported inflation, the central bank could remain adamant on keeping rates low while addressing the pressure of imported inflation from the fiscal side.
“There is clear pressure for BOT to react, especially if price increases broadened. However, price pressures are moderating, with the latest April consumer price index (CPI) released today pointing to a weaker-than-expected trajectory.
“We expect BOT to keep its monetary policy unchanged throughout 2022 at 0.5 per cent,” it added. — Bernama