BNM On Hold

As expected, the Monetary Policy Committee kept the Official Policy Rate pegged at 2.75% today, pretty much as everyone was expecting (emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 2.75 percent.

The global growth momentum has moderated in recent months….Domestic economic activity, however, remains strong. Given these developments, the assessment going forward is for the global recovery to proceed at a more moderate pace.

…As in other regional countries, Malaysia's export growth has, however, slowed in recent months…Leading indicators suggest that private consumption and private investment will continue to expand. This is also supported by the favourable labour market conditions, positive consumer and business sentiments, low inflation and conducive credit conditions.

…Going into 2011, inflation is projected to continue to remain moderate.

The MPC considers the current monetary policy as appropriate and consistent with the latest assessment of the economic growth and inflation prospects. At the current level of the OPR, the stance of monetary policy continues to remain accommodative and supportive of economic growth.

I didn’t think there’s much call for a further hike this year – to put this into context, what I think we’ll be seeing from now on will be essentially on-trend growth, rather than the sharp increases in GDP growth driven by the recovery.

If that’s the case, then we’re looking at an interest rate setting closer to the first half of this decade, when overnight money traded between 2.70%-2.80%, rather than the second half when the OPR was set at 3.50%:

Of course, a resumption of the commodity price bubble of 2007-2008 would change monetary policy thinking substantially, though subsidy rationalisation won’t, given its glacial pace so far.

Neither do I see BNM cutting the OPR if growth disappoints, or even if the advanced economies fall back into recession later this year. Neither scenario will include the kind of collapse in trade volume that threatened the economy in late-2008, which would necessitate a full blown monetary response.