Monday, July 15, 2013

BNM Watch: Interest Rates On Hold But Liquidity Support Increasing

Last Thursday’s Monetary Policy Committee meeting resulted in another anti-climax (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…

…For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand. The sustained weakness in the external sector may, however, affect the overall growth momentum. Going forward, private consumption is expected to remain steady underpinned by income growth and stable labour market conditions. Capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects will also support investment activity…

…The MPC considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth. In addition to domestic conditions, the MPC will continue to carefully assess the global economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy.

The language is a little more cautious than the preceding couple of meetings, but the expectations appear to be for continued growth even as inflation remains subdued.

Having said that, the signs of stress appear to be there even on the monetary front. BNM is having to do a lot less to maintain the overnight rate on the OPR target (RM millions):


Over the last five months, BNM has effectively released almost RM24 billion into the banking system, indicating upward market pressure on the overnight rate i.e. liquidity is getting short. The biggest reason for that is banks’ desired reserve level has also increased (RM millions):


Deposits of FIs at BNM are now at the highest level since early 2011, although well below the record amounts set aside in early 2008 during the commodity price run-up.

The symmetry between BNM bills outstanding and deposits of FIs at the central bank in 2013 is very close, though the drop in bills exceeds deposits by about RM4 billion, which leaves the interpretation that liquidity conditions are getting a little tighter than last year’s.

Previous declines of this magnitude in bills outstanding have coincided with periods of economic or financial stress (e.g. the bursting commodity bubble in 2008 and the Greek debt crisis coming to a head in late 2011), which is a good enough reason to be a little cautious about the state of the economy.

So even though the policy stance has not changed does not mean BNM has been sitting on its hands. Loan growth over the first few months of the year has been pretty anaemic, largely due to slowing loan demand rather than higher credit standards, and has fallen below 10% in annual log terms for the first time in three years.

We’re edging closer to a bias towards easing.


  1. "Hmm"

    That's all I got to say.

    1. Is Bank Negara Corrupt?July 18, 2013 at 9:14 PM

      Maybank used its money to shore up Air
      Asia X. Maybank is owned by the Malays. Why must it enriched an Indian Tony Fernandes?

      The new 20 ringgit is the similar to the 10 ringgit. The 50 ringgit similar to 5 ringgit.
      The 20 cents and 50 cents also similar.

      Whats going on in Bank Negara?

    2. How is this relevant to this thread?

    3. 1. Maybank is not a shareholder in Air Asia X, so I don't know what you're talking about. If you are referring to lending, if Maybank confined itself to business with Malays only, then it would not have been able to contribute all these years to the significant accumulation of wealth under ASB and ASN.

      2. Apropos to that, referring to the majority ownership of Maybank by the funds under PNB as "Malay" is the kind of unthinking arrogance that upsets East Malaysians.

      3. Apart from the 20sen/50sen coins, I don't see the similarities.

    4. BNM Management capabilityJuly 24, 2013 at 10:54 PM

      Corruption in BNM is not related to the thread. But it affect the ordinary Joe like me..haha.

      Every time I pay, I really have to pay close attention when paying with 20 ringgit note or 10 ringgit note. I thought I was the only one but after listening to other folks, people have complained.

      It is just an inconvenienced that we the common people have to put up with. But is this necessary? Britain change their notes every 100 years. But BNM change Malaysian notes every 15 years to keep the printers happy.

      Then of course there is the rumour some Minister brother were influencing the plastic 5 ringgit printing.

      And now new notes again!! Is my inconvenience just the price I have to endure for some people to make money?

      To hear the condemnation of a pakcik. Of all the colours in the rainbow why do BNM have to make the 20 red like the 10. Why the 5 similarly green to the fifties. This is incompetence of the Malays in BNM. Yes. Some people get so angry with the new notes that the tempias is on UMNO and Government competency.

      And sad to say they may not be far wrong. Someone is making money of the frequent new notes changes.

      Who is monitoring the banks? Why are banks allowed to buy IPO shares so that they dont fall below the IPO pricing. The recent airasia x ipos have all the sign of financial crooks at work. A company with no profit history was valued at 3 billion. Maybank a GLC, forced to buy to stop stop price from falling. AirAsia owned by Kalimullah and Tony fernandes. Two well known figures u might say.

      These is real wealth creation for some people. Did EPF or PNB bought these Airasia X shares?

      It beats talking about BNM overnight rates..haha

    5. 1. I'm colour-blind and have a hard time distinguishing between reds and greens, yet I've never had any problem with the new notes.

      2. You might have an issue with BNM's management of adding the new notes if they were doing a full recall and exchange of old notes and coins. But the new issues is simply part and parcel of the annual increase in currency in circulation. The money "printing" happens on a regular basis.

      3. However, with respect to those terrible plastic RM5 notes:

      You're a little late to the party.

      4. With respect to Air Asia X, apparently Maybank Investment Bank (note: not Maybank proper) is acting as "stabilisation manager" for the IPO, which is the first I've ever heard of such a thing. They were of course already co-underwriters for the IPO (for which they probably already earned their pound of flesh).

      The terms as I understand it is they can put a floor under the IPO price, but only for the first 30 days, which ends today I think. There seems to be a lot of action in the stock from both bulls and bears, so I don't expect there to be much fallout from this.

      As an aside, the amounts mentioned are chicken feed to EPF and PNB, little more than rounding errors. Knowing the people in charge, I don't think they would have directly invested in AAX.

    6. Somebody Must Go to Jail AirAsia IPOJuly 27, 2013 at 9:57 PM

      "If you are referring to lending, if Maybank confined itself to business with Malays only, then it would not have been able to contribute all these years to the significant accumulation of wealth under ASB and ASN."

      These are very similar words to that utter by Tengku Razaleigh on Bank Bumi.
      "Kita boleh buat lebih banyak untung jika kita membantu perniagaan Cina seperti di Hong Kong"

      Famous last words indeed before the Carrian Chinese losses. Too enamoured by Chinese businessmen. Only Malays Iam afraid. Other people are afraid to lose their money to the Chinese. All Chinese listed companies in Bursa are below their IPOs.

      Banks are source of funds. If Malay banks help Malay business that will only contribute to overall Malaysian business.
      Capital is God.

      In this AirAsia IPO, this is a very risky proposition. AirAsia have no 5 year profit record so how can it be listed on Bursa?

      Why Maybank? Why not Public Bank be forced to buy and defend AirAsia IPO? Because they cannot control Public Bank. The chinese are not stupid.

      MIB however is run by Tengku Zafrul a crony of Nor Yakub a crony of NST Editor ex Kalimullah, crony of Tony Fernandes.

      How much does MIB made in this deal to profit PNB and the Malays? How much?
      If ever there is a profit.

    7. 1. Carrian was hardly the first nor the last time that BBMB lost money and had to be rescued. I could also mention UMBC and others; and the all-too frequent occasions where Bank Pembangunan and Bank Pertanian had to have their capital "topped" up. Were these all Chinese related losses?

      2. Money is endogenous, which means bank lending is not a zero sum game. The idea that lending to others reduces credit supply to Bumis has no basis in fact.

      3. Public Bank isn't very big in investment banking, which means they miss out on a lot of these deals (both profits and losses).

      4. Again, whether MIB makes money on this or not, its still chicken feed to PNB. And if they lose money, heads will roll. My ex-boss is not known for his tolerance.

    8. This is a great read on how the stabilization process works

    9. @Shadow Banker,

      Thank you, now it becomes clear. Air Asia X's IPO was so heavily oversubscribed that the underwriters "oversold" the issue, and are now buying back to replace the borrowed shares.

  2. Different perspective and something to think about....

  3. why your blog keep shaking one huh?

  4. Just breaking my silence, to wonder aloud if Bernanke's testimony to Congress tomorrow will be crucial

    About the other thread, reply is forthcoming soon.

    Warrior 231

  5. Read your blog 2 days ago and am fascinated! Forgive me for being very ignorant but what's the difference between the OPR and the BLR?

    1. OPR = Overnight policy rate. It is the target that BNM sets for the interbank overnight borrowing rate, and is the primary monetary policy tool.

      BLR = Base Lending Rate. This is the rate at which ibanks base their lending rates on, and is determined by each individual bank.

  6. Hi Hisham H

    Er I am the SWK AKA POP AKA Shadow Banker. Once again, a superb analysis and the way how you linked the decline in BNM bills outstanding to general conditions of liquidity stress is a real gem. The link was not obvious too many.

    I would like to comment on this piece and appreciate your thoughts on it.

    The symmetry between BNM bills outstanding and deposits of FIs at the central bank in 2013 is very close, though the drop in bills exceeds deposits by about RM4 billion, which leaves the interpretation that liquidity conditions are getting a little tighter than last year’s.

    Well if we net out the transaction what we have is banks replacing one stock of liquid assets (BNM Bills) with another stock (BNM reserves). Total supply of liquidity in the system was constant.

    Would it be an indication of a lack of demand to translate excess funds into credit assets rather than a lack of liquidity?

    1. Shadow Banker,

      "Total supply of liquidity in the system was constant."

      Actually it increased slightly. More to the point, the maturity profile has shortened, as the BNM Bills are typically issued at 6-month maturities. Reserves are of course "on demand".

      "Would it be an indication of a lack of demand to translate excess funds into credit assets rather than a lack of liquidity? "

      Liquidity has nothing to do with credit. Banks don't need excess funds to create new loans.

  7. Fitch Ratings lowered its outlook for Malaysia’s A- credit rating to negative from stable yesterday, citing worsening
    prospects for reducing government debt levels. Whats yout take on this ? Also i am interested to know your thoughts on where MGS bond ylds are heading and outlook for local interest rates going forward. Thanks.

    1. Fitch has recently been more pessimistic about Malaysia, but their rationalisation is a little thin (both this year and last year). I think the move was based on a qualitative (i.e. subjective) change in their view, rather than any change in fundamentals.

      As for interest rates, I don't see much room for MGS yields to come down. Our house view is rates should start moving up towards the end of this year.

  8. It is very sad that some people jump to conclusion (and always pitting one race against another)without making the effort to understand the action of Investment bank vs the Air Asia X IPO.

    And by the way I am chinese and i own share of Maybank. Not all shareholder are Malays and i think it is one careful bank.

    So please "Is bank Negera Corrupt" leave race out of this and do not let it colour your views.

    Zuo De.

    1. good one mr anon, let's keep the race out of this...
      why don't we just focus all our energy on economic issues and our country's welfare in general, and toss away all those racial tensions, n political issues to the ground..

      election is already over, and now is the time to build our country together.

      if anyone have any problem with the political environment in our country, please, please keep it inside for now, and burst it out to your might on the next general election..

      let's build our country together.. *all for one, one for all*