June 2010 Monetary Conditions Update

Despite three consecutive 25bp hikes in the Official Policy Rate, growth in M2 is keeping pretty steady (log annual and monthly changes, seasonally adjusted):

Countdown to MPC Meeting

The consensus is leaning towards another 25bp OPR hike (excerpt):

Economists expect rate hike next week

PETALING JAYA: Although Malaysia’s year-on-year (yoy) export growth of 21.9% to RM52.3bil in May fell below market expectations, economists are still positive on an interest rate increase next week…

…Bank Negara raised its key rate by 25 basis points to 2.5% in May – a normalisation process after rate cuts during the global downturn.

AmResearch senior economist Manokaran Mottain told StarBizWeek that although the numbers showed slower-than-expected-growth, it was still at respectable rate…

…Thus, Manokaran said the interest rate hike next week would likely to go on.

“But after July 8, I think there will be a pause pending on the development then,” he said.

Standard Chartered Bank economist Alvin Liew was quoted by Reuters as saying despite the slower exports growth in April and May trade data, these two months of data still pointed to a decent second-quarter economic performance…

…“As our expectations for a healthy recovery in first half of this year remains intact, we reiterate our view that the central bank is likely to continue normalising interest rates further to suit current economic conditions.

“We expect Bank Negara to hike rates by another 25 basis points at its July 8 policy meeting and thereafter keep the overnight policy rate on hold at 2.75% for the rest of the year, which is the normal rate for the OPR in 2010, in our view,” he said.

Like any good economist, I’m in two minds (or two hands) on whether continued “normalisation” of interest rates is called for. With growth likely to slow and external demand likely to fall off, we’re still faced with a substantial output gap, i.e. there’s still unutilised capacity in the economy, which means there won’t be much pressure on consumer prices in the near term. The relative strength of the MYR also means less inflationary pressure from imported inflation.

So what’s the case for continuing to raise interest rates? BNM’s concerns will be centred, to their credit, on asset markets, which has not been a particular focus of central banks until this past financial crisis. But before getting into that, what other indicators would matter?

First, inflation is pretty tame, so raising interest rates effectively mean also a rise in real interest rates:

…which is what BNM is aiming for. By raising the cost of borrowing, BNM is hoping to limit a build up of leverage and consumption that would raise consumer and asset-price inflation. Consumption indicators are up this year, such as loans (log monthly changes):

…but not to any great extent. Housing loans are a fairly big chunk of the increase (defying the increases in interest rates: more on this later), but other loans for asset purchases aren’t too troubling (log monthly changes):

…and working capital loans are growing at least as fast.

Turning to the asset markets, the FBM-KLCI has almost fully recovered to its 2007-2008 peaks, and you could argue that at these levels, the stock market is overvalued:

…which is supported by the market’s historical PE-ratio:

Price has outrun earnings, and the market needs a period of consolidation (i.e. companies need to start registering profits, not prospective profits). But I’d note that the stock market was well into its current sideways trading phase before BNM started raising rates, so this isn’t an obvious immediate concern.

More solidly, house prices have started to pick up at the end of 2009 (log annual changes; 2000:100):

…but 3% per annum doesn’t exactly qualify us as an overheating property market. The only thing that stands out is prices of high-rises, which rose 8% in 4Q 2009, and apparently primarily in Penang. So what we’re looking at here is a potential limited market bubble confined to a small (but volatile) segment of property. Tightening monetary policy to keep a lid on this strikes me as using a hammer to swat a fly. The other aspect of this is that based on the limited data available to me, interest rates have a very limited impact on property sales – population and income growth matter much, much more.

In short, there doesn’t seem to be much of anything going on right now to justify a rapid increase in interest rates. What BNM is really doing is trying to peer through a half-obscured crystal ball and trying to head off potential asset price bubbles, but with the trade-off of slowing growth in the interest rate-sensitive parts of the economy despite an economic recovery that still isn’t fully settled.

I’ll leave this post with one further nugget – money velocity (read this post for fuller details) still hasn’t recovered to pre-crisis levels:

In fact, the rate of change in the velocity of monetary aggregates is still negative (log annual changes):

Juxtaposing this with money supply and economic growth suggests that far from being expansionary, monetary policy is in reality still too tight:

M3 adjusted for inflation and velocity is signalling a real interest rate level of nearly 10%, far above the approximately 1% difference between the OPR and CPI/Core inflation measures. So I don’t think an interest rate hike is fully justified right now.

On the other hand (you knew that was coming, right?) here’s an alternative viewpoint, from a highly respected economist who was one of the very few to foresee the financial crisis in the US:

Monetary Policy or Fiscal Policy

...Perhaps more worrisome is the view that the main problem is aggregate demand is too low. In response to ultra-low interest rates, the thinking goes, households will cut back on savings while firms will invest more, demand will revive, and the workers who have been laid off will be rehired.

But this recession is not a “usual” recession. It followed a period of ultra-low interest rates when interest sensitive segments of the economy got a tremendous boost. The United States had far too much productive capacity devoted to durable goods and houses, because consumers could obtain financing for them easily. With households recovering slowly from the overhang of debt resulting from the binge, and with lenders extremely risk averse, it is unrealistic to expect households to spend beyond their means again, and unwise to try to tempt them to do so...

...Put differently, the productive capacity of the economy has shrunk. Resources have to be reallocated into new sectors so that any recovery is robust, and not simply a resumption of the old unsustainable binge. The United States economy has to find new pathways for growth. And this will not necessarily be facilitated by ultra-low interest rates.

What many people forget is that interest rates are also a price, and shape not only the level of economic activity but also the allocation of resources and the relative wealth of buyers and sellers of financial savings. A sustained period of ultra-low interest rates will favor the segments of the economy that took us into the crisis – housing, durable goods like cars, and finance. And it will encourage households to borrow and spend rather than save. With policies focused on reviving the patterns of behavior that proved so costly the last time around, it is ironic that President Obama wants the rest of the world to change and spend more to displace the United States as spender of first resort, even while the United States is unwilling to make any changes itself.

Put differently, aggregate demand is indeed insufficient to restore the economy to old patterns of production. But that production was absorbed only through an unsustainable debt-fueled, asset-price-boom-supported consumer binge. And even if we think U.S. consumers have become excessively cautious (it is hard to see a savings rate of 5 percent as excessive caution, except in relation to the extravagant past), moving them back down the same path seems unwise.

More important, the United States also has a problem of distorted supply. Prices in the economy should reflect the past misallocation of resources and move resources away from areas like housing and finance. A lot of people have to be retrained for the jobs that will be created in the future, not left lamenting for the jobs they had in the past. A Fed that keeps real interest rates at a sustained negative level will stand in the way of the needed reallocation.

None of this is to say that the Fed should jack up interest rates quickly without adequate warning, or to extremely high levels. There are trade-offs here, between short-term growth and long-term misallocation of resources, between reducing risk aversion and inducing excessive risk taking, between reviving hard-hit sectors and encouraging repeated bad behavior. On balance though, if and when the jitters about Europe recede, it would be prudent for the Federal Reserve to start paving the way towards positive real interest rates.

Interesting, no?

Government Debt and the Potential For Crowding Out

Hoisted from comments:

Wenger J Khairy said...

Dear Hisham H,

I for one have not a clue what the NEM is neither is worthwhile even spending an iota even discussing it. Actually what business activity can the Government directly influence without incurring additional debt. That itself is going to be a self defeating point of view.

Lets put some facts on the table.

Nos 1 the myth that the Government somehow is responsible for some huge subsidy. 1MPM6 mentioned that the "subsidy" is RM 70 billion budgeted for 2010.

RM 70 billion subsidy? Who is he kidding. The actual subsidy to consumeres [sic] was 2 major items, the subsidy for fuel - RM 10 billion, to be shared with the glorious IPPs,allocation for MARA RM 2 billion and the subsidy for interest on the PTPN fund - about RM 1 billion.

The big ticket items lumped together in this transfer payments mistaken by the PM for subsidy was

RM 15 billion - interest on debt
RM 10 billion - Pensions
RM 6 billion - to the Unis (wonder why our students need to pay fees on top of this, and this is only the Op Budget)
RM 1 billion – KLIAB

The balance RM 15 billion was a hodge podge of various accounts with corpratization being a chief culprit.

So essentially the domestic economy is like a merry go round. Spend today like theres no tomorrow.

Unfortunately for the gomen, is that short term rates are now starting to spike up. Our debt duration which used to be very much in the long term during DSAI is now 50% in the short - medium term with massive refinancing of debt over the next 3 yes. The gomens weighted interest rate is 3.4ish %, imagine what the "subsidy" for Gomen debt will be in 2012 if interest rates were to spike to 5%, (of course triggered by some currency crisis / short term money flow out.)

Key thing is BNM's forex reserves. Thanks to the wisdom of Pak Lah we have a sizable cushion. However, for all our supposed current account surplus, the end inc in BNM foreign reserve position has been 0 for the last couple of months owing to the massive "reinvestment in overseas" phenomenon.

So where JPM fears to tread let I Wenger J Khairy put it succinctly.

A massive public deficit will reduce the cost of capital which means more and more of bank loanable funds will be used to prop up MGS and GII. 0 credit growth in all sectors except the household sector.

Any decision by Uncle Sam to start to raise interest rates would put a pressure on BNM to do the same or else pummel the Ringgit.

Option A- Raise Interest rates
Public deficit continues to swell touching past RM 500 billion in 2012. This puts the soverign rating of the country at risk, not that local banks have a choice. In the end banks prop up the gomen and no new investment in the industry, which means declining international trade which means a potential decline in the BNM reserves which mean a downward bias on the ringgit (PPP fanboys be forewarned).

Option B- BNM continues to keep rates low, which means Ringgit gets pummelled on the forex market

So either way long term I see Soros prediction of 5 to the dollar becoming a reality and a massive inflation spike to hit the country in 2012.

SO says I Wenger J Khairy

Wenger paints a nightmare scenario, one I think has a low probability of happening, but he does have some highly pertinent points that bear examination.What he’s talking about is what’s called in economic terminology the “crowding out” of the private sector, as public sector demand on financial resources or the concomitant increase in the cost of capital reduces private consumption and investment. I don’t think that’s likely in Malaysia over the short term, though a failure to generate GDP growth over the next two years would certainly bring this factor potentially into play, as the government tries to pick up the slack in terms of deficient demand. It’s also a potential factor as we go through the latter half of the decade unless growth picks up, and the implementation of the NEM successfully shifts the burden of growth to the private sector.

In any case, my comments on Wenger’s post are as follows:

1. Subsidies – the breakdown of government operating and development expenditure by function is available in BNM’s Monthly Statistical Bulletin. Operating expenditure classified as subsidies were RM35.2 billion in 2008 and RM18.6 billion in 2009, nowhere near the RM70 billion quoted for 2010, so Wenger has a point – as far as it goes. It depends on whether you classify development expenditure as subsidies. If you do (and I’ll grant you it’s a bit of a stretch), then the RM70 billion figure is suddenly very plausible. Development expenditure was RM42.8 billion in 2008 and RM49.5 billion in 2009. (Technical Note: for those who are curious, the Malaysia Plans effectively lay out the government’s development expenditure over each 5yr Plan period).
   
2. Debt duration and interest burden – this is something I’ve noticed myself, as the bulk of issuance over the past couple of years has been in 3-year and 5-year maturities, rather than the 5-year and 10-year maturities that the Treasury usually favours. Effectively, that means the Treasury might have some trouble rolling over maturing debt in 2012-2014 when the bills come due, on top of the additional borrowing requirement for deficit financing over the next couple of years (Wenger’s estimate of RM500b sounds plausible to me, though I think it’s probably about 10% too high and one year too early).
   
   I honestly don’t think this will lead to crowding out of private investment or household financing over the medium term however, because Wenger missed one thing – the financial system is just sloshing with liquidity. Commercial bank holdings of MGS and GII are just 3.7% of their total assets, while loans comprise just 58.7%. As of February, commercial banks have RM187 billion on tap at the central bank – or nearly double the borrowing needs of the government for the next two years.
   
   But the spike in short term rates is real enough:
    
   I think this is a combination of a couple of things: BNM’s “normalisation” of interest rates which puts a floor under MGS yields, and (paradoxically) a reduction of investor uncertainty.
   
   The recession drove a big increase in demand for short term, risk-free securities against a relatively static supply in MGS maturing in less than one year, which drove down yields at the short end while widening the spread between maturities. Now that the recovery is well entrenched, the return of risk appetite should shift demand towards the longer end of the yield curve, while also converging yields across the maturity spectrum i.e. the yield curve is going to flatten.
   
   Note that under the current monetary regime which uses an interest rate target as the policy instrument, interest rate volatility should be relatively low compared to the volatility of the exchange rate or money supply (see the difference in MGS yield behaviour pre- and post-July 2005 in the chart above). If this thinking holds true then spreads over the past year or so were an aberration, and convergence should see spreads tightening again. In other words – don’t read too much into the spike in short term yields.
   
3. Forex reserves – I think you’re off base with this one, Wenger. If BNM is allowing the Ringgit to float and only intervening during periods of high volatility, as I believe they are, then changes in reserves will not reflect flows of capital at all. I suggest you use this instead:
   
   (Change in Reserves) + (Change in commercial bank net foreign assets) - (Change in trade balance) = (Estimated Capital Flows)
   
   This doesn’t capture reinvestment, but yields a more realistic estimate of inflows or outflows of capital:
   
   
   But I agree with Wenger’s assessment that money is leaving (or staying) outside of the country.
   
4. A massive public deficit will reduce the cost of capital - I think this is a typo - shouldn't it be "raise" instead?
   
5. Any decision by Uncle Sam to start to raise interest rates would put a pressure on BNM to do the same or else pummel the Ringgit – I don’t think this will happen. US rate hikes might slow or halt the appreciation of the Ringgit, but on balance the fundamental story for the Ringgit will still be up. Even with the uncertainty over the trajectories of the two economies, this isn’t a tough call to make. It’s useful to think of it this way – what matters is the real interest rate differential, not just the interest rate difference (click on the pic for the larger version; shaded areas mark Ringgit appreciation relative to the USD): 
   
    
   It’s not a perfect match (note the initial drop in the real interest rate differential during the appreciation of the Ringgit post 2005), because the joker in the pack is the perceived risk premium, which is (i) unobservable, and (ii) time varying. In any case, we have a pretty long head start on tightening, and any US moves in that direction will have to cover a pretty significant gap in Malaysia’s favour. I find myself at odds with Soros – I think a sub RM3.00 to the USD rate a more likely outcome by 2012.
   
   Statistical Note: technically, because the exchange rate (I(1)) and the real interest rate (I(0)) are of different orders of integration, the relationship cannot be long term. Specifically, the real interest rate can only effect the rate of change in the exchange rate, but not its level.
   
6. This puts the soverign [sic] rating of the country at risk… – This is an interesting and valid point, and related to the risk premium I referred to in my previous point. Actual external debt is fairly low and dropping:
   
   
   But the real sensitivity of government debt to the sovereign risk rating, which on surface only directly affects non-Ringgit denominated government debt, is quite a bit higher than that. You have to add in foreign holders of domestic debt to the external debt numbers:
   
   
   …and probably take into account the external debt of NFPEs and the private sector as well, as these will also be affected by a rerating. On the other hand, I don’t think this will matter much at least over the near future because (i) the ratings agencies didn’t exactly get covered in glory the past couple of years, and (ii) the universe of alternative investments isn’t exactly that great. The thing is, while deficits matter for short term interest rates, long term it’s the debt to GDP ratio that investors look at. And on that score I think we’ll be fine:
   
   
   We’re still below the 60% level where investors start getting worried, and far below the 90% level where government borrowing starts impacting growth. Other countries in the region are on par or worse, and the advanced economics are far more at risk of seeing crowding out over the near term (many have damaged financial sectors as well). Malaysia’s total external debt position (public + private) isn’t all too bad either:
   
   
   Going forward, as long as the pace of government borrowing (i.e. the deficit) lags nominal GDP growth, as I expect it will this year, then the debt to GDP ratio should stabilise or retreat. Traditionally there are three ways for governments to reduce their debt burden. Higher taxation (works) or equivalently, reduced expenditure (which works even better – see this post) is what most people think of. The other two are inflation through monetary expansion or other means, and boosting economic growth directly which changes the denominator.
   
   I suspect all three are in play for Malaysia – the actual government debt level at the end of 2009 was a full RM18 billion below my estimate, suggesting that cuts in expenditure may have reduced the borrowing requirement below the projected range defined by the two stimulus packages and the original budget for 2009. In essence, the government traded off public consumption in favour of public investment.
   
   Second, inflation should return to its long term average later this year of around 2.5%-3.0%, which will have a small but measurable impact on the real debt burden (5% MGS yields notwithstanding – yes I think that’s distinctly possible as well, but primarily through higher inflation driven by faster growth).
   
   Third, trade growth is being driven by changes in the terms of trade through rising commodity prices, and not in volume of manufactured goods. The mining and agricultural sectors have never been big borrowers relative to the manufacturing industry, so would be less sensitive to crowding out by public borrowing (of course, their output and income are also more volatile). Another factor is that the manufacturing sector is suffering from massive over-capacity, so there is plenty of slack (and less financing required) to pick up output even in the absence of long term financing.
   

In short I don’t think the crowding out scenario is credible just yet, though a double-dip in the world economy will guarantee we’ll have trouble. Also there’s no doubt that higher interest rates will eventually impact the private sector, but given we’re starting from a below-optimum point, I’m uncertain how much that effect will be or at what point it will kick in. On the other hand, I don’t think at this stage government borrowing will exhaust or impinge the capability of banks to finance business, given the existing excess liquidity situation we’re in.

In passing, I actually like the NEM, less because I think it will have much of an impact on Malaysia reaching high-income status (I think demographic factors and the exchange rate will take care of that), but because it sets the foundation for sustaining higher income growth in the future - as in 20-30 years from now. But one effect that the NEM will have right now is it’s market-orientation. If the government holds to this principle, then there’s a good chance private investment will flow again. More pragmatically, the sale of government owned companies and assets will help offset the need to borrow.

Quis Custodiet Ipsos Custodes

I’ve always had mixed feelings about criticising news report and editorials. On the one hand, I realise that it could take away the focus of this blog from the purpose I intended for it, which is to cover developments in the Malaysian economy. I ‘m also fairly sure that such posts could make me come off as petty (I plead not guilty) or intellectually arrogant (maybe guilty as charged).

Against that, there’s the role of the press in reporting and commenting on national policies (which has an impact on political accountability), and its role as opinion leaders. If there are mistakes in this arena, whether by omission or commission, then there is some value in pointing those out even if I don’t have the reach that they have.

Of course, whether you consider a particular viewpoint a “mistake” really depends on one’s point of view and educational background.

I think I’ll continue to have ambivalent feelings about this issue, but will proceed nonetheless.

BTW, if it seems I pick on The Star too much, it’s because out of the major English dailies I find that, right or wrong, they actually do have something to say about the economy. The News Straits Times appears to be interested only in human interest stories and sports. Ok, that was exaggeration, but justified exaggeration IMHO.

To round up some the articles that caught my interest this weekend:

1. Managing Editor P Gunasegaram thinks marketing Bursa Malaysia is putting the cart before the horse, and we should put our economic house in order first. For once, I fully agree with him.
2. Raymond Roy Tiruchelvam asks to consider purchasing power parity when comparing incomes in other countries, if you’re considering immigrating. I only ask that you don’t try using it for comparing the level of exchange rates unless you want another scathing editorial on this blog! BTW, instead of using the Big Mac Index (what, again?), I would use the World Bank’s International Comparison Program, or the Penn World Tables. Either would give a better multi-product idea of the differences in the price levels.
3. Angie Ng talks about normalising the costs of borrowing and investing in property. But she makes the odd statement that, “Normalising the interest rates by allowing it to be decided by actual market forces of demand and supply is certainly more healthy.”  Sorry to break this to you Ms Ng, but whether BNM sets the OPR at 0% or 10%, interest rates are market determined. All the OPR does is set a 50bp band to the overnight rate, everything else is determined by the demand and supply of money. Of course with the OPR target, BNM has its hand on the scales so to speak in terms of the money supply, but demand is entirely free to vary. There’s also in the article the meme that low nominal rates disadvantage deposit savers, which is not necessarily true – it’s real rates that matter, and those generally rise during a downturn unless the central bank cuts the nominal rate. Had to point that out, sorry.
4. Jagdev Singh Sidhu rounds up opinions from various research houses on the strength of the economy given the great numbers we’ve seen the past couple of months. The consensus is that the recovery is credible, but we should see better evidence on its sustainability in the second half of the year. It was pointed out by a few analysts that exports and industrial production are off their peaks of 2008. Way to go guys! But if you consider 2008 as a bubble year (which I do), then the recovery is over – we’re now back to the growth phase, and growth sustainability is a much harder question to answer. Again everyone seems hooked on analysing growth statistics (even if they note the base effect), and most are not bothering about the actual levels. And no one noted that poor capital goods imports are a direct result of the excess capacity that already existed before the recession started. Don’t look for high capital goods imports this year, it just ain’t coming. Nor will the lack of it say anything at all about manufacturers’ plans, intentions or prospects.

The Clock Is Ticking…

Tomorrow’s GDP report will have some interesting repercussions. It won't only serve as confirmation that the economy has recovered (this post covers my thoughts on this), but also as a precursor to what the Governor refers to as “normalisation” of policy – which in BNM terms means the interest rate.

I don’t think we have to wait on tenterhooks for what the report will bring, as the PM has already let the cat out of the bag, and the Governor has been preparing the ground for an imminent rate hike for the past month.

On that basis, I’d expect a 25bp rate hike at next week’s monetary policy committee (MPC) meeting. More important however is the question as to what extent BNM will pursue “normalisation” this year. The last interest rate raising exercise began in 2005:11 and ended in 2006:4 spanning 5 MPC meetings, lifting the OPR from 2.70% to 3.50% (I got the details wrong in my previous post on this by the way). I don’t think we’ll see that level of aggressiveness this time, as the previous experience was largely a tightening exercise.

I’m still thinking in terms of a 75bp hike this year, with hikes probably every other MPC meeting – there are six meetings scheduled this year, with the next one coming on March 4th, then May 13th, 8th July, 2nd September and 12th November. So if there’s a hike next week, look for further hikes in July and November. All of this is predicated on a subdued outlook for inflation of course.

On another note, I did a quick and dirty forecast for 3Q 2009 GDP a few months back, based on the IPI. Using the same model (static one-step forecast), here’s the 4Q 2009 forecast:

Point Forecast:135720.14, Interval forecast: 138434.80-133005.48 ...which would be about 3.4% annual growth, or about 6.7% qoq annualised. However, from the hints dropped by the PM, I'm more inclined to think the actual would be closer to the upper bound of the forecast, which gives 5.5% annual growth and 15.7% quarterly.  If you think that’s a wide range, it’s just par for the course with these types of simple models. We’ll see tomorrow evening.

Monetary Policy Update I

Since BNM has opted not to change the OPR from the current 2.0% level, have there been any substantive changes in the monetary policy stance? Are they putting monetary easing on hold with expectations of a recovery in the second half, or is something else going on?

The three instruments of monetary policy are interest rates, money supply and the exchange rate - I will deal with the latter two in separate posts. There's a few interesting things happening on the interest rate front.

The OPR as a policy instrument is aimed at putting a band around the interbank overnight rate. On that score, March data shows market rates right on the money:



In fact, the spread between the overnight rate and 6 month money is a ridiculous 8 basis points.

Yields on BNM bills and Treasury bills have fallen in tandem, though it’s hard to say where the real market lies with these assets because volume is either low or non-existent. There's just enough action on T-bills though to show the yield curve is still inverted (for the third straight month), while flattening slightly:



The movements in MGS yields in March are fascinating. Recall that the mini-budget was tabled in the first week of March, and we already saw a general movement toward the short end with spreads on longer term yields up sharply across the yield curve. With the expected federal borrowing requirement now known, the market acted accordingly:



The yield on the extreme short end fell, but medium term yields reflected the potential supply situation. I'm a bit at a loss to explain the compression in spreads at 10yr maturities and above, unless it’s because recent auctions have concentrated on medium term maturities - the three MGS auctions in March were for 3 year and 5 year terms. The latest data shows yields on these maturities still inching up. On the other hand, it looks like the market is well able to digest planned government borrowing, RM60 billion stimulus package and all, with yields about on par with the last couple of years.

More importantly for the domestic impact of monetary policy is the continued fall in average lending rates (here for commercial banks):



...and net of inflation:



However, this is still a little higher than I'd like. Despite the fall in lending rates, it's still lagging the cuts in the OPR - the spread between lending rates and overnight interbank money has actually been rising since November, and is at the highest point since early 2006:



This is probably reflective of perceived higher default risks, although we probably won't see any upward movement in delinquent accounts until the second half of the year.

With inflation as it is, the OPR and interbank rates are resoundingly negative which should be a strong enticement to banks to lend. While loan growth has held up (which I'll cover in the next post), there is still a lot of caution and fear - note the massive RM173.5 billion on deposit with BNM, despite the cut in the SRR to 1%. The only positive I see here is that both interest rates and net lending margins are lower than they were in the last downturn in 2001, but since the scale of this downturn is more severe, that's cold comfort.

Technical Notes:
All interest rate data from March 2009 Monthly Statistical Bulletin. Inflation is based on log annual changes to my spliced Consumer Price Index (2000=100).