PETALING JAYA – With Bank Negara Malaysia maintaining the Overnight Policy Rate (OPR) at 3%, and the US Federal Reserve (Fed) alluding to more measured interest rate increases, the local market is likely to remain tepid.
MIDF Research opined that while it expects the central bank to maintain the key interest rate at 3% throughout the year, external factors such as a drastic shift in monetary policy in the US could possibly put upward pressure on the OPR.
It said the Monetary Policy Committee’s decision was anticipated as industrial and trade activities in major and emerging economies remained on an upward trajectory.
According to Bank Negara, the decision to keep the OPR unchanged is due to monetary policy remaining accommodative and supportive of economic activity.
Over in the US, Fed chair Janet Yellen remarked in her testimony to the House Financial Services Committee on Wednesday that there will be a gradual increase in interest rates and the unwinding of its US$4.5 trillion (RM19.3 trillion) bond portfolio.
“Even though US Fed is shrinking its balance sheet, it may not be that bad for equities worldwide even if the Bank of Japan and the European Central Bank are still expanding their balance sheets because that could still mean that funds will continue flowing into the US and its equities,” Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew told SunBiz, noting that the implication of the Fed’s balance sheet reduction alone is not significant for the global equity market.
Michelle Chia, head of economics at CIMB Investment Bank, said higher interest rates could result in higher cost of borrowing in the US, and carry trade could spill into emerging markets, including Malaysia.
“While there is a risk that shifts in market expectations may spur renewed volatility in global capital flows, we think the Fed has pursued and will continue to pursue a very gradual and well-communicated approach to policy normalisation.
Additionally, measures adopted by Bank Negara since December 2016 provide policy ammunition to curb spillovers in the bond and foreign exchange markets if volatility resurfaces,” she said.
An economist who declined to be named said the market is likely to remain neutral amid this development, with equities across the world seeing a jolt in gains in the wake of Yellen’s speech, which indicated that there may not be a rush in rate hikes.
The FBM KLCI, which opened higher in the morning, closed the day 3.46 points or 0.2% lower at 1,753.78. The index has gained 6.83% year-to-date.
The economist said the ringgit is likely to remain unchanged on the back of the cautious outlook displayed by the US on its economy, which also indicated a less hawkish approach on its monetary stance.
“That means the market is thinking that the Fed may less likely to raise rates aggressively. That could take the pressure off investors to take the money out of the country. (It is) relatively good for the ringgit and the capital market,” he said.
The ringgit strengthened slightly to RM4.2920 against the US dollar as at 5pm yesterday.