BNM Watch: No Change…Again

The language has shifted a little, and a bit more cautiously optimistic on the external front:

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 economy continues to be confronted with some uncertainties. While there have been improvements in the advanced economies, risks to sustained recovery remain…

…In the domestic economy, the latest indicators point to robust investment activity and continued expansion in private consumption. Going forward, this trend is expected to continue…Investment is being led by capital spending in the domestic-oriented sectors, the oil and gas industry and the ongoing implementation of infrastructure projects. The external sector is also expected to improve and provide additional support to the economy.

…While inflation is expected to rise during the year, the expectation is for it to remain modest. Higher global prices of selected food commodities and domestic factors are expected to increase costs and contribute to higher prices…

At this stage, I don't think we're going to see much in the way of policy action at all this year...barring any "unknown unknowns" making an appearance. I'm still of the view that a bias towards tightening should be warranted towards the end of the year, but BNM has historically been more accommodating toward growth rather than inflation.

One very good reason for policy inaction or even for a loosening of policy, is that if you subscribe to a NGDP growth target you’d be pretty disappointed with monetary policy decisions over the past year (log annual changes):

You can see the effect of weaker global commodity prices on narrowing the growth rates between nominal and real GDP quite clearly from here. If BNM is right about stronger market prices going forward, then we should see a rise in NGDP growth nearer to Malaysia’s long term norm of about 10%, and no policy action would be needed to boost growth.

Anecdotal evidence appears to support the slower NGDP growth story – the past quarter’s earnings “season” has been described as “disappointing” i.e. profit growth has been below expectations.

There’s also the dichotomy between the reported numbers and what people are saying on the ground – again, nominal income growth for companies and workers doesn’t seem to jive with increases in real output.

Weaker growth in nominal prices are having an impact.

This also explains the relatively poor performance of the MYR recently, as low commodity prices generally allows for a weaker exchange rate for commodity producers.

The bottom line is that there does exist a case for looser monetary policy, even if it goes against my more “conventional” instincts based on the dataset that more usually informs monetary policy decisions.

I think the economy is close to full capacity – the labour market certainly indicates it – and a loosening of monetary policy would just trigger higher consumer inflation with all that entails. On the other hand, nominal income growth (and wage inflation) are a necessary condition for reaching high income status, so a little higher rate of inflation might actually be economically useful, especially if there is continued weakness in global commodity prices.

I feel conflicted, and I think this is a conflict that will continue to plague me for some time to come.