Economy

Economy: Post interest rate liftoff; what's next?
While the US interest rate hike was largely expected, Maybank-KE notes that the speed and scope of future hikes remains as a huge guessing game. Future hikes are expected to be driven by data even though the Fed’s “dot plot” chart indicates that the Fed is likely to hike four times in 2016.

Despite this, Maybank-KE feels that the Fed’s views and forecasts on inflation are optimistic particularly in view of depressed energy prices. The house thus expects the Fed to hike two to three times in 2016 for a total increase in rates by 50-75 bps.

Other key takeaways from the Fed hike points to the relative strength of the world’s largest economy which is expected to grow 2.4% in 2016 on an inflation-adjusted basis.

Another point to note is the fact that the Fed will be reinvesting principal payments from its holdings of maturing securities purchased under QE and rolling over maturing Treasury securities. This means that the Fed’s balance sheet will not shrink anytime indicating that the Fed is still in accommodative monetary policy mode.

While the jury is still out on the impact of the rate hike, downside risks with the end of the three super cycles are becoming apparent.
1. USD index downward trend appears to have been broken, implying greater strength in the USD
2. Conversely, the global commodity price index has seen its upward trend broken in line with a slowdown in China as well as the strong USD
3. The global bond index is now trading sideways, breaking a previous upward trend.

Looking elsewhere, Hong Kong adjusted its base rate immediately after the Fed liftoff in view of the HKD’s hard peg to the USD.

Other than HK, major central banks, namely the BoJ and ECB are seen as maintaining the status quo of zero-bound/negative interest rates and QE stimulus measures.

While the house expects most Asian economies to maintain their current interest rate levels throughout most of 2016, China, India, and Vietnam are likely to see interest rate cuts as the central banks there try to boost economic growth.