November 2012 Monetary Conditions

One of the toughest challenges a writer can face is overcoming writer’s block – it’s hard to start writing again once you’ve stopped for a while. It’s even harder when there’s not much to write about, as Malaysian data over the past couple of months have been indicating an economy that’s been cruising along (in other words, b-o-o-oring).

So here’s my attempt at getting things going again. There’s all sorts of stuff I plan on covering, but it might take a while to get around to all of them, especially with my present work load (I’m currently working, among other things, on a country profile for a GCC member – not exactly helpful for thinking about the Malaysian economy).

In any case, here goes:

BNM Watch: Don’t Expect Anything Today

The Governor’s remarks from yesterday (excerpt, emphasis added):

OPR at 3% very ‘accommodative,’ says Zeti

KUALA LUMPUR: The overnight policy rate (OPR) at 3% currently is accommodative but will keep tab of inflationary risks, Bank Negara said.

Speaking on the sidelines at the EU-Malaysia Chambers of Commerce and Industry's Quarterly Financial Panel Discussion, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said: “The benchmark interest rate at 3% is very accommodative.

December 2011 Monetary Conditions

Now that we know interest rates aren’t going to be cut, at least until March, what did the latest data tell BNM?

The money supply situation doesn’t look too gloomy (log annual and monthly changes; seasonally adjusted):

In fact, it looks positively healthy to me – maybe even too healthy. Both M1 and M2 are growing at near 14% on an annual log basis, and monthly growth is pretty positive as well. Breaking it down, there were decent increases in pretty much all major categories except in forex deposits, which isn’t too surprising given the turmoil in global markets during the holiday period.

Assessing BNM’s Crisis Response

Quite in keeping with yesterday’s announcement, there’s a new working paper from the IMF which looks at the monetary measures implemented by BNM during the 2008-2009 recession and assesses their effectiveness (abstract):

An Assessment of Malaysian Monetary Policy during the Global Financial Crisis of 2008-09
Alp, Harun and Selim Elekdag & Subir Lall

Summary: Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM’s monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

BNM Watch: OPR Maintained At 3%

Not exactly an anti-climax, but pretty close (excerpt; emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

Monetary Policy On Hold: No Surprise

The Committee’s looking forward, not back (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

Latest indicators suggest that the global growth momentum has moderated in recent months…

…The domestic economy improved in the third quarter, due primarily to stronger domestic demand…Looking ahead, the weaker external environment could, however, impact the overall growth prospects…

BNM Watch: Last MPC Meeting Of The Year

I don’t think anybody’s thinking will have changed with the stronger numbers coming out in the last couple of months. The almost unanimous consensus is that the Monetary Policy Committee will maintain the Official Policy Rate at 3.00% in their meeting today, and I can’t really disagree, even if I think core inflation is too high and credit expansion a little too frothy.

The main consideration will continue to be sustaining economic growth, and the deteriorating outlook for Europe and slowing growth in China and India may weigh down any hawks on the committee. The US and Malaysia’s other trading partners look better, but output expansion in these regions aren’t going to break any records soon.

Nor do I think there will be much chance for a rate cut either, as the outlook isn’t that bad yet and the selldown in the Ringgit over the past three months with little central bank intervention represents a de facto policy easing all on its own, even if BNM sticks to its interest rate target.

So I’m not looking for any surprises today.

BNM Watch: No Change

Unlike the last time, the Monetary Policy Committee’s statement yesterday was an anticlimax (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

Global growth has moderated in the recent months as growth in the advanced economies slowed by more than expected following the greater policy uncertainties, worsening of confidence and heightened financial market volatilities, amidst continued weaknesses in labour market conditions. Going forward, the advanced economies are expected to register a slower pace of growth than earlier anticipated...

...In the domestic economy, recent indicators point to slower growth in external demand following the weaker global economic environment. Domestic growth prospects, however, continue to remain positive, underpinned by the expansion in private consumption and private investment. Employment conditions remain favourable amid sustained business and consumer confidence. The public sector will also continue to support economic growth. Moving forward, the more challenging external environment has, however, increased the downside risks to the domestic economy...

...Going forward, inflation is expected to remain relatively stable for the rest of the year. While cost-push inflation continues to remain, the pace of increase is expected to be more gradual. The upside risks to inflation will also be contingent on whether the strength of domestic demand will be sustained, in the event of further deterioration in the external conditions...

There was also no mention or separate statement on the SRR, which remains at 4%. Given the data coming out lately, the chance of an interest hike at the next meeting on November 11 (also the last for the year) is also vanishing – though that outlook may change if, as they say,  conditions change in the next couple of months.

BNM Watch: OPR To Stay On Hold

I’ve said what I wanted to say on this subject yesterday, but in case anyone missed it, I agree with the consensus – the Monetary Policy Committee won’t increase interest rates at today’s meeting. Also this time, the Stat Reserve Ratio is likely to stay on hold too, though for a different reason – seasonally adjusted growth in M2 crashed in July on a month on month basis:

A lot may change between now and the next meeting on November 11, but if I had to bet I’d put my money on BNM staying pat in that meeting too.

BNM Stays On Hold

As expected, BNM stayed pat on the OPR at 2.75% for another meeting. The language of the press statement is about as unenlightening as…well, as a typical economist’s statement (excerpt; hit the link for the full statement):

Monetary Policy Statement

…The MPC considers the current level of OPR as appropriate and consistent with the latest assessment of the economic growth and inflation prospects. The stance of monetary policy continues to remain accommodative and supportive of economic growth. While domestic financial conditions remain orderly, greater vigilance will be accorded to the potential risks arising from large and volatile capital flows.

Waiting On The MPC Meeting? Don’t Bother.

Today marks the last meeting for the Monetary Policy Committee in 2010 (the announcement is due at 6.00pm local, about 10.00am GMT)). Virtually nobody is expecting a further interest rate hike at this juncture as there’s simply no call for it.

Monetary conditions over the past few months have been pretty stable, with maybe a slight concern over heightened loan growth – and even that’s not too far off the reservation. The external outlook continues remains uncertain, even as the Fed prepares for another QE blitz that may result in further cash heading to emerging markets. I’m expecting growth in 3Q GDP to flatline, so further monetary tightening (pace loan growth) isn’t warranted.

So I think this meeting will really be a non-event in terms of the current stance of monetary policy. The only thing of interest this evening is BNM’s take on the future trajectory of monetary policy, particularly what BNM plans to do if portfolio inflows exceeds the bounds BNM is prepared to accept.

As the pace of Ringgit appreciation has slowed down over the past two months, helped along by some judicious intervention, there are less worries that the Ringgit will outrun Malaysia’s economic fundamentals. But it would be interesting to see if there will be any mention of currency intervention or alternative measures that BNM might take, in the event that the Ringgit and Malaysian asset prices continue to rise at an accelerated pace.

Just don’t expect an interest rate increase to be on the menu just yet.

Banks And Housing: No Systemic Risk…Yet

I attending a talk on property today, which brought to mind the “evidence” that we have a budding property bubble. The consensus today is that there isn’t one, despite the anecdotal evidence – just a boom stemming from pent up demand. Prices haven’t zoomed as excessively high or are as volatile as they are in Singapore or Hong Kong.

But my focus is more on what systemic risk a potential bubble – or boom, as the case may be – might pose to the banking system. I already talked about this issue at the beginning of the month, which to my surprise was one of my more popular posts.

May 2009 Monetary Policy Update

BNM at the latest MPC meeting kept the Official Policy Rate (OPR) at 2%, but average lending rates have thankfully kept coming down:



The latest May data shows average lending rates just a hair over 5%, which is the lowest on record (at least since 1980), although on a real basis, it's still fairly high at about 2.6%. The spread on lending (based on interbank overnight rates) is also nearer "normal" levels, but still too high for my comfort given the current circumstances:



Money supply growth has responded to lower deposit rates, continuing to decelerate (log annual changes):



But so have loans (log annual changes):



That's the first time loans have seen net repayments since Dec 2007. In the money market, the MGS yield curve has continued to steepen, particularly at the long end:




That's factoring in a lack of demand for longer tenures due to uncertainty, as well as a lack of supply. I'm a little unsure what to make of the evolution of the MGS yield curve. On the one hand, it approximates the spreads seen between 1999-2005, and as such might conceivably be seen as "normal" in one sense. On the other, the compression in spreads between 2005-2008 suggest that the lifting of capital controls and the float of the MYR allowed for greater interest and participation from foreign investors; which immediately suggests that the widening we're seeing now is a function of the pullout by foreign investors over the last year, and that we should see the yield curve flatten again once conditions stabilise. I prefer the latter explanation, but the other could equally be true.

Prognostication Is A Risky Business

Surprise, surprise - BNM hasn't cut the OPR this time. My worry on this has generally been on whether the monetary transmission channel is working properly. They seem to think it is, despite the relatively slow movement of average lending rates downward, as well as factorng in the impact of fiscal stimulus kicking in by July.

I guess we'll see.