March 2010 Monetary Policy Update

After all that has happened during the past week in Europe and in capital markets, it might seem a bit strange to focus on more mundane local happenings but with a possible rate hike coming on Thursday, reviewing the arguments for and against takes precedence as this will have a more immediate and direct impact on the Malaysian economy.

On the face of it, there’s little enough evidence to recommend a rate hike, save for the “normalisation” of interest rates that BNM is committed to. Money supply growth is hardly excessive (log annual and monthly changes; seasonally adjusted):

…although loan growth looks a little high, it isn’t excessive either (log annual and monthly changes; seasonally adjusted):

Inflation is tame, and while I expect it to go up it should remain below Malaysia’s long term average of around 2.5%-3.0% for the year (log annual and monthly changes; 2000=100):

Interest rates have of course responded to the last rate hike in early March:

…but MGS yields have turned down slightly due to increased foreign portfolio capital inflows, which have landed primarily on the government bond market as the most liquid “safe” asset to park in.

The big risks in BNM’s view is less on consumer price inflation, but rather asset price inflation and the risk of a setback externally. In that sense, the indicators I’ve outlined above are probably of less importance.

Unfortunately, there’s not many solid clues to look at here. MGS yields turning down is a sign of bullishness among investors, as is the (up to last week at least) rising MYR. The KLCI looks like its tapped out for the moment (though I’m no stock expert):

On the non-financial side, house prices seem to have recovered their upward trend, but all the action seems to be confined to high rises which have inherently volatile prices anyway (and for some strange reason, most of the price increases in Q4 2009 appears to have been driven by prices in Penang).

Household borrowing zoomed up on a y-o-y basis, but has generally moderated over the past couple of months – the base effect again (log annual and monthly changes):

The external front is less clear, with the US continuing on a rocky road to recovery, but Europe risking another downturn. Growth in East Asia is of course continuing at a fairly torrid pace, though few if any of the monetary authorities appear particularly eager to start tightening too rapidly, which should keep regional demand up.

On balance, there seems to be little argument for a rate hike *right now*, as opposed to waiting two more months to the next meeting in July. That GDP growth is going to be impressive in Q1 2010 is neither here nor there – with the bottom of the recession occurring in Q1 2009, this past quarter’s growth was going to be above average anyway.

Right now, I’m leaning towards BNM holding steady at this coming meeting, as much because there’ve been no comments from the Governor to prepare the ground so to speak, as anything else.