The Monetary Policy Committee will be meeting this Thursday and the consensus opinion is that there won’t be any change. I don’t think so either, but pressure will be mounting.
BNM won’t be the only central bank deciding on monetary policy this week. Also on the clock are Australia, Canada, Brazil, Poland, Albania, the UK and the ECB. I expect no change from the latter two with the ECB having already pre-announced the start of Euro-area QE beginning this month and the BOE likely to stay the course. Brazil was the odd man out, with a 50bp hike in January.
But the other four countries (Australia, Canada, Albania and Poland), all shaved their policy rates in the past two months and could potentially ease policy again. The two critical ones for Malaysia are Australia and Canada – both are big energy producers and exporters, and both have suffered negative terms of trade shocks from declining oil & gas prices. That similarity alone would be enough to raise speculation of a rate cut by BNM. The fact that their economic exposure is comparatively smaller makes the case for a Malaysian rate cut even more compelling.
What differentiates Malaysia from them though is where we are in the business cycle. Both Canada and Australia have seen their non-oil economic growth slow, whereas Malaysia is seeing a pickup in the electrical and electronics sector.
I’d actually argue for a rate cut (while talking down the Ringgit) as a bigger buffer against the oil price decline. Nominal GDP growth is weak, and likely to get weaker in the first half of this year (log annual and quarterly changes):
The GDP Deflator has already turned negative and would dive deeper into negative territory this year (log annual and quarterly changes):
We’re already facing some headwinds from slowing wage growth, a potential consumption shock from GST, cuts in oil & gas capex, and weaker than expected government expenditure. Money supply and bank lending growth have continued to moderate, indicating weaker economic activity. That’s a decent case for contemplating an easing in monetary policy, if not at this meeting then at the next one.
The flip side is: we still have concerns over household debt and debt servicing, real production is still robust, and the employment implications from slower oil & gas revenues is pretty minor. This could be a transitory phase, until the economy adjusts. Long term, a decline of the O&G sector could be a blessing in disguise – it forces the government to diversify away from O&G based revenues and it vaccinates the economy from Dutch Disease.
On balance, don’t bet on any change this week.