Monday, February 4, 2013

BNM Watch: OPR At 3.00%

I’ve been playing single parent this past week while my wife is overseas, hence the late commentary on Bank Negara’s first monetary policy statement for the year. Not that there’s much to comment on, given the relative boringness of current monetary conditions (excerpt):

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 economic activity is showing signs of improvement, albeit at an uneven pace. Growth in the major advanced economies remains constrained by ongoing fiscal consolidation and weak labour market conditions. In Asia, growth is supported by sustained domestic demand and a gradual recovery in external demand. Stress in the international financial markets has also receded. Notwithstanding these improvements, downside risks to the prospects for global growth still remain.

In the domestic economy, a broad set of indicators suggests robust expansion in the fourth quarter of 2012...Looking ahead, domestic demand is expected to continue to expand, underpinned by firm private sector activity...while investment will be led by capital spending in the domestic-oriented sectors, the oil and gas industry and the on-going implementation of infrastructure projects...

...In 2013, inflation is expected to be higher but to remain modest. Selected global food prices and domestic factors are expected to increase costs and contribute to higher prices. Nevertheless, given modest global growth prospects, pressures from global commodity prices is expected to be contained.

I don’t see any potential move any time in this first half of the year, and I hardly think anybody else thinks so either. The second half might be different – given the wave of infrastructure and property projects coming into play this year, we might be dealing with accelerating inflation in the second half, and certainly a deteriorating current account.

But looking more than six months ahead has always been a bit dicey, though I’d be more comfortable if we had longer gaps between major investment projects.

I’m reminded in this case of what happened in the mid-to-late 1990s, when Malaysia had a number of mega-projects taking off all at once. That had positive feedback loops into the economy, and Malaysia’s property sector ended up overheating, with you-know-what effects. I’m not seeing the same thing this time, mainly because the Ringgit isn’t overvalued as it was back then. But this is still something to be concerned about – and to watch for – in the months to come.


  1. Hi Sir, I first discovered your blog few months ago and has been following your posts closely since then. Thank you for creating this space that allows others to educate themselves benefit from your thoughts.

    Anyway, regarding your prediction on the deterioration of Malaysia's current account, would you mind explaining your notion behind that? Because given the government's intention to reduce the budget deficit further next year, does it not imply that there will be more savings available to fund the domestic consumption and investments and therefore the decreasing need to rely on foreign capital? Assume that the trade balance improves due to the pick up in US and Chinese economy, coupled with the decrease in factor income payable due to a lesser reliance on foreign capital inflow, wouldn't the current account position improves instead?

    I apologize if I have asked a question that make no sense to you. My understanding on the concept of current account could even be terribly wrong. However I will appreciate it very much if you could point my mistakes to me and also explain how did you come to your conclusion on the current account prediction. If even that proves to be too demanding, I wish you could at least tell me the key concept that you used in your process, so that I will be able to study them and get the answer on my own.

    Once again, a million thanks to you for paying even the slightest attention to this comment!

    1. Hi Sean,

      First, don't call me sir.

      Second, the impact of government spending on the current account is actually pretty marginal, except when looking at its contribution to aggregate demand in relation to potential output.

      However, I'm looking at it a little more holistically. Higher investment equates to higher aggregate demand. If demand is greater than potential output (i.e. supply), a classical closed economy model indicates that there will be a response in prices, rather than a response in output.

      In other words, if you're spending more than your ability to produce, you will not get higher real output, but higher prices instead - in short, inflation.

      However, if you look at an open economy model instead, some of this demand will be met by excess supply elsewhere, i.e. there will be an increase in imports instead, which ceteris paribus should lead to a deterioration in the trade balance and hence the current account.

      You might want to reference the output gap.

      Looking more deeply into the matter, we are also not dealing with a one- or two-good world. The projects being undertaken would require many inputs that Malaysia simply does not produce - LRT/MRT trains for instance, or high-spec industrial components.

      Therefore, even if the increase in nominal demand does not exceed Malaysia's potential output (and hence doesn't lead to demand-led inflationary pressure), imports are still likely to rise because there is no domestic source of supply for the specific goods needed.

      I'm not exactly being prophetic here, as this is a trend we've already been tracking. Imports of capital goods for 2012 are running at double the pace of last year and more than double overall imports.

  2. Wow that really opened up my mind.. Something new that I haven't thought of before.. Now I have a better understanding on the dynamics of the economy. Thanks for your time! Truly appreciate it, and Happy Holidays!