Monday, August 3, 2009

June 2009 Monetary Policy Update

Since Bank Negara have left the Official Policy Rate unchanged for the last few months, monetary conditions have largely settled down. Growth in M2 and M3 have begun to turn up, despite base money growth decelerating (log annual changes):

However, we're beginning to hear some noises that BNM may be contemplating a further cut, largely I think due to the continuing steepening in the MGS yield curve:

June saw RM4b in MGS and RM5.5b in GII in new issues, which represented an approximate 3% increase in net government debt, on top of the RM13.8b issued in May - which helps to explain the rise in long term rates. We're not looking (yet) at any particular hurdle to further public borrowing as auction yields continue to be near historical lows, while the banking system still has considerable excess cash. But the rate at which the yield curve is steepening, when funding for the stimulus packages as well as the budgeted development spending deficit for this year has yet to be fully met, must be worrying the Treasury and Bank Negara.

Other money market instrument rates are also creeping up, as are retail deposit and lending rates, albeit not to the same degree. FD rates are averaging 1bp higher than in May and average lending rates are 2bp higher, while the yield curves on BNM bills and T-Bills are also steepening. Loan growth has dropped a shade under 8%, which is the lowest level since July 2007 (log annual changes):

I'm still trying to work out how, or if, core inflation is figuring into BNM's calculations. I've worked out a longer span for the core inflation rate (CPI less food and transport) I talked about here, but I find my synthetic index a little unconvincing, especially since it spans a change in base year as well as components in 2005 (log annual changes; 2000=100):

This makes a little more sense than CPI inflation as a guide to the monetary policy stance:

...but I think it needs a little more work. Taking away the broad food and transport categories is a little drastic, since those two put together encompass more than half the CPI. What I probably need to do is deconstruct the broad categories further, but that would require a bit more leg work than I've got time to do right now unfortunately. Stay tuned on that score.

Getting back to what's going on, I don't know if a further interest rate cut is going to be at all effective - short term rates are right on BNM's policy rate, and all the (bad) action is happening at the longer end of the curve. Cutting the OPR won't effect those rates much, if at all. Quantitative easing might work, but that's not going to go down at all well with investors or the public. In any case, the 5-10 year MGS is probably where the bulk of issuance will happen, and yields on those tenures are still more than palatable. So any interest rate cut would probably be only on the cards if 5yr MGS yields move over say 5% - the last time that happened was during the 2000 downturn.


  1. In my Tract The Age of Turbulence: Plea for a New World Economic Order, I explain the nature and causes of economic depressions.

    A turbulence in fluid mechanic is a chaotic state of a liquid. It Owns Most of the Proprieties of The Liquidity Trap, Origin of The Crash, it is a filled with Random Phenomenon and Discontinuities.

    It proves that after the inflation of the Mother of all Asset Price Bubbles the ominous fate of this economy is Keynes' Liquidity Trap.

    Its consequences are a new, bigger Crash causing, this time, a real Great Depression II.

    That bipolarity of the Market is the problem an person who is irrationally exuberant, as any psychiatrist would tell, is unable to understand that he will necessarily fall in a deep depression. He just doesn't want to hear the warning no matter how many times he had that experience.

    What do we do Before The Crash?

    Preparing for the Crash, The Age of Turbulence. Proposes a strategy to profit from both the Irrational Exuberance and from the Crash.

    Using the yield curve as a predictor that strategy covers Treasuries, Corporate Bonds, Minerals (Oil, Precious Metals and Base Metals.) and Stocks.

    Its aim is to profit from both the Asset Price Bubble and Irrational Exuberance and The Crash and Economic Depression that will necessarily ensue.

    It tries, and for the time being very profitably, to accomplish Alan Greenspan Mission Impossible:

    "That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer.

    Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances.

    Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."


    The clear evidence of underpricing of risk did not prod private sector risk management to tighten the reins.

    In retrospect, it appears that the most market-savvy managers, although conscious that they were taking extraordinary risks, succumbed to the concern that unless they continued to "get up and dance", as ex-Citigroup CEO Chuck Prince memorably put it, they would irretrievably lose market share.

    Instead, they gambled that they could keep adding to their risky positions and still sell them out before the deluge. Most were wrong."

    Alan Greenspan
    The Age of Turbulence: Adventures in a New World [Economic Order?].

  2. But what do we do After The Crash?

    I propose a plausible alternative solution to the Depression: I designed a System that will allow us, when The Crash will come, to get out of Credit Based Free Market Economy, Capitalism, and transfer to my Adjusted Credit Free, Free Market Economy and Abolish the FED:

    To participate in our new economy you need to Enter Your €5 in The Cra$h R€gi$t€r. Before The Crash.


    "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

    It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.

    But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.


    A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies. It connects individuals who might never otherwise be known to one another, and gives every man of the trade a direction where to find every other man of it.


    A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary."

    Adam Smith
    June 5th, 1723 – July 17tn, 1790
    An Inquiry Into the Nature and Causes of the Wealth of Nations.
    Inequalities Occasioned by the Policy of Europe.
    March 9th, 1776

    Buy Now The Tract That Will Be Published September 17th, 2009.

    You will enjoy my popular articles:

    Ron Paul vs. Bernanke.

    Ben "Systemic" Bernanke.

  3. If the BNM cut rate based on your reasoning (i.e. increasing cost of borrowing while fiscal stimulus funding is underway), I would be worried about the independence of the BNM.

  4. Absolutely right - and it also illustrates the problem of having a dual mandate rather than just price stability.

    Now, we're also potentially looking at a triple mandate, with systemic stability tacked on top of everything else. The political economy dimensions definitely concern me.