Further US interest rates hike coming, but seen as not steep

IT comes as no surprise that the United States Federal Reserve (Fed) has raised its base rate to between 0.75% and 1%, as a stronger US economy prompted a second hike in US interest rates in just under a decade.

The good news from the hike is the planned trajectory for US interest rates. Indications are that the pace of hikes would not be as steep, but the underlying tone is that the US will move towards normalising interest rates.Fitch Ratings now expects a total of seven hikes in 2017 and 2018, bringing the policy rate to 2.5%.Such a move will depend on inflation in the US and also just how the US economy reacts to various policies that are in the pipeline. Big tax cuts and infrastructure spending there will lift growth and also inflation, but the US Fed is reportedly willing to stomach higher inflation for a bit, although it has an inflation targeting policy.
For emerging markets, the news of the Fed’s action was received well. The stock market in Malaysia jumped, given that the pace of interest rate increases in the US will be more tapered. It can be argued that the jump in the market in Kuala Lumpur has little to do with the Fed’s action and more for an improving outlook of banking stocks.

As the Fed starts to raise rates again, some will argue that real rates will remain negative for some time. The question is, what will happen when real rates turn positive and what will the impact be then on the dollar and the economy? Until that happens, one should look back at what the decade of low interest rates has done for many countries, including Malaysia, and wonder just for how much longer should we continue with that.Europe, where interest rates set by the European Central Bank are at 0%, has not seen a boost to investments that can drive growth. Japan has had super-low interest rates for such a long time and now growth is only nudging upwards with monetary stimulus.

For Malaysia, the period of low interest rates in our context has acted as a buffer towards supporting economic growth, together with higher Government spending.
While those two prescriptions had stabilised the economy during a period of great external shocks starting from the Global Financial Crisis and then Europe’s debt woes, it has also led to a build-up of debt that has become a problem for Malaysia.Household debt is close to 90% of gross domestic product and Government debt is below its 55% self-imposed debt ceiling, but around the 70%-range when contingent liabilities are included. Some may argue that near-historic low interest rates for Malaysia will over time be negligible for the economy.

Just how much spending can consumers stomach with debt so high and low interest rates having driven up house prices to make it now unaffordable for many Malaysians.
Economic growth is now in the 4% range which has been trending down for some time, and investments are not expected to rise this year compared with 2016.There is also the issue of a shrinking trade balance. Higher rates in the US will just put more pressure on the ringgit against the dollar.The debt issue for Malaysia will be an albatross for the economy in the years ahead, and if growth is meandering along, then there will be pressure on people, companies and the Government should interest rates in the US close in on the normal range.It is then no surprise to read that productivity growth is now what is being looked at to drive the economy in the years ahead.

It is the right strategy to get growth going, given the current circumstances.etting more from less is something the economy needs to focus on, and in time, the authorities should start looking at normalising interest rates in Malaysia.
Only then can normalcy return to the economy.