Federal Open Market Committee (FOMC) – Pause Not Stop
- Federal Reserve pauses, maintaining current Fed Funds Rate (FFR) at 5.00%-5.25%. This is in line with the “hawkish pause” that was widely expected as market also took cues from the declining headline inflation seen in May’s CPI print.
- Fed Chair Powell’s press conference indicated room for hike in July. He reiterated the Fed’s commitment to 2% inflation target and acknowledged upside risk amid persistent inflation pressure in reference to Core Personal Consumption Expenditure (PCE). Furthermore, He also downplayed stress in banking system, particularly the systemic risk stemming from exposures to commercial real-estate sector.
- Fed’s forecast revisions and rate trajectory implies possibility of 2 more rate hikes. The change in FFR median dot plot from 5.10% to 5.60% not only rules out possibility of rate cuts in 2023 that was previously expected by the market but also suggest another two 25bps hike. This was justified by their higher revisions in real GDP growth, Core-PCE and lower unemployment rate forecasts. Notably, the Fed foresees inflation declining to 2.50% only beyond year 2025, taking a longer time to close-in on their 2% target.
European Central Bank (ECB) – More To Go
- European Central Bank (ECB) hikes rate by 25 basis points (bps), taking deposit rates to 3.50%, marginal lending facility to 4.25% and main refinancing rate to 4.00%. ECB also decided to discontinue reinvestments into their asset purchase programme starting July’23, with effects equivalent to quantitative tightening.
- President Lagarde hinted at the possibility of another hike in July. Overall forward guidance was largely unchanged with the governing council (GC) being “data-dependent” and
committed to 2% medium term inflation target. While inflation is still projected to be “too high for too long”, the GC acknowledged the gradual impact of past rate increases across
the economy and that tightening financing conditions are key to bring inflation towards target. - ECB revised core inflation forecast higher and GDP growth lower Core CPI was revised upward from 4.60% to 5.10% for 2023 taking into consideration past upward surprises
and robust labour market. Meanwhile, GDP growth was adjusted downward from 1.00% to 0.90% in 2023
People’s Bank of China (PBOC) – Rate cut
- PBOC diverges from peers; cuts made to 7-day reverse repo rate and 1-year medium-term lending facility (MLF). The PBOC cut the reverse repo rate and MLF by 10bps each to 1.9%
and 2.65% respectively, which was the first time since 3Q22. - China economic data continues to disappoint; notable weakness in manufacturing and property sectors. Despite initial expectations of a strong rebound in Chinese economic activity, the latest economic data in May’23 for industrial production and fixed asset investment remained below consensus. Retail sales was still on an uptrend, but failed to meet expectations. Thus, we view the PBOC rate cuts as a monetary policy response to prevent China’s recovery from losing momentum domestically while the external environment grows increasingly fragile
Opus View
We are starting to see divergence in central banks’ monetary policies with some continuing to hike rates, some pausing and may stop and some cutting rates. Inflation continues to be the reason for those that are still hiking. However, global growth has already shown signs of weakness with some economies already or going into recession. There is risk that central banks may continue to increase rates to bring down inflation even as economies goes into recession. As such we see more downside risk in terms of growth forecast.
We expect most economies to end hiking by 3Q2023, but interest rates could remain higher for longer, even into 2024. In view that there are more rate hikes in advanced economies, the interest gap with our Overnight Policy Rate (OPR) is expected to widen and put further pressure on the Malaysian Ringgit (MYR) going forward. As such, we see the possibility that Bank Negara Malaysia (BNM) may hike the OPR to 3.25% if MYR continues to weaken.
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