Thursday, May 20, 2010

OPR Trajectory Subject To Prevailing Conditions

The Governor is keeping her options open:

Zeti: Further hikes in OPR will depend on economic performance

Governor Tan Sri Dr Zeti Akhtar Aziz said the normalisation process for the overnight policy rate (OPR) was a “dynamic one” and depended on how the economy performed.

“The process of normalisation is a dynamic one, if there's a slowdown in the economy then we'll pause but if there's growth then we'll continue,” she told reporters on Wednesday.

The next Monetary Policy Committee meeting is scheduled for July, which means at best they’ll be deciding on the level of the OPR based on April and May economic numbers.

I’d originally thought that BNM would stand pat in May and raise in July, as 1Q 2010 numbers were good, but not so good as to justify a rapid tightening in policy. Certainly the developments of the last couple of weeks stemming from the dramatic fallout from the bailout of Greece, where there’s been a reassessment of Europe’s chances of a sustained recovery, argue for some caution.

Sharp falls in commodity prices also augur badly for sustained trade growth, since that has been the main driver for Malaysia’s export performance since at least 2006. And 1Q 2010 GDP growth had mixed numbers on a quarter to quarter basis.

But the rest of the region is still being pulled along by the China’s economic dynamo (Singapore has just revised 1Q 2010 GDP 2% higher – pdf link), and prospects in the US and Japan appear to be brighter.

On that basis, I think BNM will add another 25bp to the OPR in July as I originally thought, even if I think the pace of tightening is a little too quick for my taste.


  1. I think BNM's rate rise was premature.

    The one off 10.1% rise in GDP in no way indicates even an aprroaching overheated economy let alone an actual one.

    Also, unlike the West, relatively "cheap" financing has not led to over-speculation in the property or share markets.

    In any event, this tinkering around with monetarist policies is a major contradiction to the free market economy system.

    But then again, after the sub-prime debacle and $700 billion bailouts in USA and likewise in Europe and UK, I think the most rabid of capitalists will freely admit that the era of state intervention and mostly managed economy is here to stay!!

    we are all of 1 rate, the Human Race

  2. Hi don, thanks for dropping by.

    From BNM's viewpoint, they aren't "tightening" policy per se, since interest rates have been and continue to be at all time lows. We're moving from a too "loose" policy stance to something more normal for Malaysia.

    I don't think overheating isn't on the policy horizon or we'd be seeing 50bp-75bp hikes, not 25bp as we are now - but I agree with you that the risks to growth are such that I'd be more comfortable with a more moderate pace of increase.

    "In any event, this tinkering around with monetarist policies is a major contradiction to the free market economy system."

    Yes, it is, but I believe the free market system is from harsh experience rather poor at coming out with socially beneficial outcomes.

    I'm less speaking here from the point of view of recent history, but rather the history of the 19th century and before - passive govenment (balanced budget doctrine) and monetary policy (gold/silver standard) meant a continuous and debilitating cycle of expansion and multi-year depressions. Contrast that with the experience of the past century where we've had exactly one global depression, and recessions that have tended to be short and relatively shallow.

    Much of the current debate is now hinging on how much intervention is optimal, but there's no question that the pendelum is swinging against free market principles.