April 2009 Monetary Policy Update

April's Monthly Statistical Bulletin released a couple of days back shows money supply growth still decelerating, except for M1 (log annual changes):



That actually worries me less than the fact that so is velocity (log annual changes):



Why be concerned over velocity? Because a fall in the velocity of money (the number of times money goes around within an economy) can amplify movements in the money supply. Falling velocity coupled with slower money growth makes monetary policy tighter than the money supply growth alone would indicate. Having said that, money supply growth is still supportive of economic growth right now:



Since adjusted M3 growth still exceeds the drop in GDP growth, we’re still looking at a loose monetary policy stance. Just be cautious when taking this chart at face value, because my methodology isn’t exactly rigorous here.

On the other hand interest rates, after the market absorbed the likely pace of government debt issuance after the tabling of the mini-budget, have settled down:



MGS spreads on the long end have continued to widen slightly but not by much, and current market data is showing a little pullback as well so I’m not overly worried about rising funding costs for the government just yet.

The banks are having a fine time though, with loan growth purring along and cost of funds very much in their favour. That part of the equation is a bit of a concern to me – the whole idea of loose monetary policy is to get credit flowing into the economy (which it is) and to lower borrowing costs (which is not). What should be cheaper funding for consumers and businesses is turning into a profit party for the banks, even bearing in mind potential losses from non-performing loans. NPLs in April have just registered the first uptick in over a year but it amounts to an increase of just RM150 million on a 6-month basis for the entire banking system, which is peanuts compared to the RM736.5 billion in outstanding loans.

In short, while BNM has cut bank funding costs to the lowest point I can remember, the margin between lending and funding is actually at the same level as it was when the economy was booming:



Never mind the increase in car financing costs – effectively the cost of every other loan is rising as well relative to what it could and should be. That makes a mockery of central bank policy, and I don’t see how this can be beneficial at all, unless it’s to boost the financial sector contribution to GDP at the expense of everyone else. Unfortunately, with the reforms under the Financial Sector Master Plan, there’s little that BNM can do about this, and we’ll just have to live with it.