Wednesday, September 2, 2009

July 2009 Monetary Policy Update

I'm scratching my head over some of the developments in interest rates - there are some minor divergences in what I'm expecting against what the markets are doing. But first, growth in monetary aggregates have stabilised over the past couple of months, which should be no surprise given there's been no change in the OPR and the signals BNM has been giving out (log annual changes):

Under the current circumstances, there should be no movement in the policy rate until at the very least mid-to-early next year. That hasn't stopped some gyrations in market interest rates however. Average lending rates are down 8bp through the end of July, which has dropped the spread over overnight rates to just under 3%:

Loan growth as a result has accelerated on a m-o-m basis (log monthly changes, annualised):

The good news is that most of July's increase came from working capital loans, and that the increase is across a broad swath of sectors (but particularly in education and health). This suggests that activity is picking up particularly in domestic oriented sectors, which is exactly the kind of recovery driver we need going forward. NPL ratios at both 6-month and 3-month spans have continued to drop:

I was actually expecting loan defaults to pick up this quarter, as it's been long enough from the onset of the crisis for marginal firms to start going to the wall. Turns out Malaysian companies may be more resilient than expected.

Turning to the bond markets, it's MGS yields that have me puzzled - despite a net increase of RM9.5 billion in government domestic borrowing in July, the yield curve has flattened at the long end:

What makes this even more puzzling is that the July issues (RM8.5 billion in 10yr MGS, and RM4.5 billion in 5yr GII) are all long dated. Anyone care to venture an explanation? Because I haven't any ideas at the moment. An increase in bond supply should ceteris paribus drop prices, which should in turn increase yields. An alternative answer is that MGS demand has also picked up in the interim which may be a factor of an increase in foreign demand, although I'm stumped why the action should happen at the long end rather than at the shorter tenures. A possible change in market risk appetite?

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