KUALA LUMPUR: The United States Federal Reserve's (Fed) signals of interest rate cuts next year may encourage international investors to reallocate their funds to Malaysia in search of higher returns.
Economists said Malaysia would benefit from the possible rate cuts as the lower interest rate could spur lending and spending in the US, prompting higher demand for Malaysian products.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the possible cuts would be significant as foreign funds would want to switch their exposure to assets in emerging economies, including Malaysia.
He said the latest forecast by the Fed clearly showed that the US central bank was preparing to shift its focus from inflation to growth.
"The rate cuts could result in foreign funds searching for a better yield as the risks of steeper cuts by the Fed cannot be ruled out.
The Fed could opt for an aggressive rate cut should there be a slowing economy."
Afzanizam said foreign inflows might increase considering that foreign ownership of Malaysian equities had declined to 19.5 per cent in October from 20.6 per cent at the end of last year.
Similarly, the foreign ownership in Malaysian Government Securities (MGS) was in a lower trajectory of 35 per cent last month co pared with 36.6 per cent in July. "I believe it is going to be positive for equities.
If the government continues to demonstrate its resolve for economic reforms, it will result in more inflows."
Putra Business School economic analyst Assoc Prof Dr Ahmed Razman Abdul Latiff said the rate cuts could prompt foreign funds to redirect their investments to other economies in search of higher returns.
Any rate cuts could also boost the US gross domestic product (GDP) next year as a lower interest rate will encourage lending and spending.
"I believe this could affect our economy positively as there will be an increasing demand for our exported products since the US is our third largest trading partner.
It is possible that there will be an increasing fund inflow."
Ahmed Razman highlighted that the interest rate cuts were anticipated to enhance the ringgit's stability.
Additionally, he said the stock market was expected to witness an increased activity, showing more substantial improvement compared to the trends observed in the past two years.
Kenanga Investment Bank Bhd (Kenanga Research) said in a report with renewed optimism in the US market on the Fed's dovish pivot, there was the possibility of averting a hard landing next year.
The firm said this could provide some level of comfort to Bank Negara Malaysia to retain its policy stance longer.
"Hence, we expect the Overnight Policy Rate (OPR) to remain at three per cent till the end of next year."
Meanwhile, MIDF Research expects the Fed to maintain the existing policy until at least the first half of next year.
This is given that inflation is still above the Fed's two per cent target and recent data suggests the core consumer price index remains sticky.
"We foresee slower growth and weaker aggregate demand will allow the Fed to begin to cut rates.
This will be subject to the overall strength of the US economy, mainly the consumption spending outlook."
MIDF Research expects the job market and wage growth to be important data to gauge the health of aggregate demand and ability of consumers to sustain their spending activities.
It added that the delayed effect of monetary policy tightening also suggested the economy would experience slower growth next year as consumers and businesses were hit by the high borrowing costs.
"If growth were to slow sharply, the Fed may consider larger rate cuts and adopt an accommodative policy to stimulate the economy," it noted. On Wednesday, the Fed voted to maintain interest rates and indicated plans for three rate cuts next year.
The decision allows policymakers to assess the need for any further policy adjustments, keeping the key lending rate between 5.25 per cent and 5.5 per cent.