Wednesday, July 6, 2011

BNM Watch: May Was A Strange Month

As I said yesterday, the data for May isn’t behaving nicely. Here’s a closer look at what’s going on.

Recall that BNM began its latest round of tightening in early May. Yet there was little sign that open market operations were required to reduce liquidity in the interbank market and raise the overnight rate to the OPR target (RM millions):


In fact, outstanding BNM bills actually fell, which suggests the opposite. Looking at the daily data shows that the overnight rate only slowly adjusted upwards to the OPR target, with occasional backsliding.

Neither did FIs themselves take money out of circulation, as reserve deposits at BNM didn’t rise either (RM millions):


Yet on the asset side of BNM’s balance sheet, forex reserves actually did rise (RM millions):


Ordinarily, this would require sterilisation – issuance of securities to counteract the injection of Ringgit. Yet this apparently didn’t happen either.

So on the one hand we have a rise in the OPR target as well as forex intervention, yet little to no net action to reduce interbank liquidity. All this while M2 has been rising, indicating higher liquidity (log annual and monthly changes):


Something does not compute. Trading volume on the interbank and money markets offer no clues – May’s about the same as in April.

The only thing I can think of is a reduction in demand – which would raise yields without requiring the issuance of securities – or BNM is allowing the overnight rate to trade lower than the OPR target. The former is unlikely, as foreign holdings of Malaysian debt securities increased for the month, and the oversubscription rate of BNM Bills also increased.

Which leaves the latter explanation – unless someone can come up with something better. While this is within stated policy (the trading band is 25bp around the OPR target), yet it marks a relaxation of monetary policy discipline. We’re not talking about much, less 10bp in the week following the MPC announcement, but it’s there nevertheless.

I fully expect another 25bp hike in the OPR tomorrow, along with another 100bp increase in the statutory reserve ratio. It would be interesting to watch what BNM will do to actually make the OPR target stick going forward.


  1. I saw this post regarding Direct Deduction Lending Scheme and hope you could give comment on it.

    Is it really that 'dangerous'?


  2. I read Snowball regularly, and he's usually pretty thorough. Interesting - he's solved one big problem for me. There's been a discrepancy between household lending from banking institutions and household borrowing in BNM's reports. This appears to be where it's coming from.

    Dangerous? Not to the banking system (these institutions are on the outside), but considering that DFIs have had to be bailed out time and again, there's an obvious long term risk to government finances. BNM's been trying to unload them to the private sector, but everybody's wary over the potential crap on their balance sheets.

  3. I have been following this blog a few months. It's great. Do you have any books (academic / reference) for me to get to know more about econ? Thanks..

  4. I'd suggest starting with Mankiw. It's not too technical, but if you're in KL don't buy it from a bookstore - go to the Universiti Malaya Bookstore instead. It's cheaper there.

    Just be aware that with any econs textbook, you should know the philosophical bent of the author. Mankiw for instance is of the New Keynesian school of thought. Most texts will either present that, or New Classical theory. Both schools have holes in their world view.

    For a reference on economic schools of thought, try this link.