Tuesday, February 23, 2010

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.

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