Reactions…What’s Normal Again?

From the Star:

RAM Holdings Bhd chief economist Dr Yeah Kim Leng described the hike both as a signal of the central bank’s confidence that the local economy recovery was on track and as a “gradual normalisation” of the historically low rates.

Bank Negara had earlier also indicated the need for the normalisation of rates, adding that any increase should be viewed as “normalisation” and not “tightening”, which is normally implemented to slow consumer demand in an overheated economy with high inflation.

According to Yeah, a “normal” level for the OPR is between 3.25% to 3.5%. He expects an increase of between 75 basis points to 100 basis points this year backed by improving economic conditions.

From NST:

HSBC expects BNM to lift the OPR by another 75 basis points this year.

The central bank chief has stressed that the process is to return the economy to normal conditions and not to choke economic activity.

"During the recession, BNM cut rates by 150 basis points and it could be argued therefore that a 3.5 per cent rate would be 'normal'," said Robert Prior-Wandesforde, senior Asian economist of HSBC.

The 2006 hike to 3.5% was in response to the boom in commodity prices, as demand from China started putting pressure on supplies. To suggest 3.25%-3.50% as “normal” means that these guys are expecting a return to the push-inflation conditions of those years (interbank overnight, averages, sample: 1997:1-2010:1) :

With external demand still iffy and China in a monetary-tightening mood, thinking 3.50% is premature. Realistically, we’re probably looking at 2.75%-2.80%, which was the rate that prevailed in the first half of the decade. Bear in mind that historically BNM has always erred on the side of growth.

Any appreciation in the MYR (already happening) will also put a cap on inflation – both core and headline measures are behaving nicely at the moment (log monthly changes):

Loan growth has just begun to pick up as well, so there’s no reason to push the panic button just yet (log annual and monthly changes, seasonally adjusted):

Domestic demand growth wasn’t terribly strong in the last quarter, so there’s a good argument for moderating any interest rate rises – I wouldn’t look for another hike until July.