Wednesday, April 7, 2010

Feb 2010 Monetary Policy Update

A little late this month, but better late than never as they say.

As ever when faced with a major festival, currency in circulation (and hence M1) jumped in February, while M2 growth fell back a bit as people converted deposits into cash (log annual and monthly changes; seasonally adjusted):


I expect the reverse to happen in March, with M1 growth dropping and M2 growth rising again, as cash gets reconverted to bank deposits.

The big story of the past month of course is not on the money supply front but on interest rates, with the 25bp bump in the OPR causing a chain-reaction across the whole range of interest bearing instruments and bank lending rates, not to mention the Ringgit. Some of the February data reflected expectations of the hike in the OPR, but none quite so dramatic as MGS yields:


Note the very sharp rise at the short end, which effectively flattened the yield curve – the bulk of the increase happened right at the end of the month in the run up to the Monetary Policy Committee (MPC) meeting. Incoming supply wasn’t a factor, as only RM3.5 billion was tendered in February and that was for a 5 year tenure (and was also 100% oversubscribed). Current MGS yields show some softening across the board, so the market is probably factoring in just another 25bp hike this year and no more.

I think that might be a little optimistic, as I’m expecting at least another 50bp increase by November. There’s so far little hard data to support that view as the stock market has been fairly settled and loan growth is running at a decent, if slightly frothy clip – no nascent asset bubbles in evidence. But I have this feeling…

Technical Notes:

Data from Bank Negara Malaysia’s Feb 2010 Monthly Statistical Bulletin

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