Wednesday, July 1, 2009

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.

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