Monday, October 15, 2012

OPR Speculation

From the Star today (excerpt):

Will Bank Negara cut interest rates next month?

PETALING JAYA: Will Bank Negara seriously look into cutting benchmark interest rates in November's monetary policy committee meeting given the deteriorating external conditions and moderating domestic front in recent months or will it continue to signal a stable rates outlook?

Most economists expect the central bank to continue keeping the overnight policy rate (OPR) on hold at 3% in November (the last meeting of the year), although a hint of caution has entered into its policy statements since July on the external environment amid signs of moderation on the domestic front…

I think this is much ado about nothing. The Monetary Policy Committee will meet up for their last meeting of the year on November 11, a little over four weeks from now. I don’t see anything in the incoming numbers to warrant a cut in interest rates at that point in time.

I haven’t done a public review of monetary conditions for a while, mainly due to sheer lack of time, but there’s nothing there to worry the MPC – loan growth has slowed only marginally and inflation is still trending down.

Although the external sector is still pretty weak, we still have excess domestic demand which is turning up as a reduction in the trade balance (higher imports) rather than in prices, while capacity utilisation and unemployment are pointing to an economy at or near full potential. The banking system’s average lending rate is just off historical lows, while yields on benchmark government bonds have been stable over the past year.

Even as some regional central banks have shifted or are thinking of shifting towards policy easing (e.g. Korea), it hasn’t been a universal movement. From a currency standpoint, I don’t see BNM being overly keen to becoming a trend-setter.

In other words, don’t hold your breath.

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