BNM Watch: OPR Still On Hold

The statement at the conclusion of yesterday’s Monetary Policy Committee meeting was a model of brevity in stating the obvious:

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global growth momentum has moderated. Economic activity in most major advanced economies is slower amid greater policy uncertainty while conditions in the international financial markets continue to be volatile. These developments are affecting growth in the rest of the world. In emerging economies including in Asia, domestic demand is showing signs of moderation amid sustained weakness in external activity.

While the Malaysian economy is affected by these global developments, domestic demand has continued to support economic growth. Looking ahead, this trend is expected to continue. Private consumption is supported by income growth and stable employment conditions. Investment activity is mainly driven by capital spending in the domestic-oriented industries, the oil and gas sector and the on-going implementation of infrastructure projects.

Headline inflation is expected to remain moderate for the remainder of 2012 and into 2013. With some excess capacity in the economy, domestic demand is not expected to result in inflationary conditions. Global energy and commodity prices are likely to be contained given the weak global conditions. However, upside risks to inflation could emerge should supply disruptions result in higher global prices for commodities.

In the MPC's assessment, there continues to be considerable uncertainties in the global economic and financial conditions. In this environment, the MPC considers the current stance of monetary policy to be accommodative and supportive of the economy. The MPC will continue to carefully assess these evolving conditions and their implications on the overall outlook for inflation and growth of the Malaysian economy.

It’s quoted in full because that’s a pretty good précis of the world economy – all in under 270 words.

The key takeaways going forward is that growth is now almost completely domestically driven, and that BNM estimates that there is still some slack in the economy – though how they figure that with unemployment at all time lows is to me a bit of a stretch. Higher imports this year also suggest that there is a structural dichotomy between goods in demand and production supply i.e. excess capacity might not be useful excess capacity. That in turn leads to the conclusion that we’ve not necessarily navigated past demand-side inflationary pressures; its just been transferred overseas.

Nevertheless, fine-tuning the economy on that basis using as blunt an instrument as short term interbank rates is probably a fools game, as it’s a structural issue that can’t be fixed with monetary policy.

Looking ahead, what I think this means is that policy rates will continue to remain on hold over the near term and going into 2013 – there’s only two more MPC meetings scheduled this year. I also think that based on the numbers we have now, growth within the government’s original forecast last year of 5%-6% GDP growth for 2012 as a whole is getting a whole lot more likely.