Thursday, July 14, 2016

BNM Watch: Surprise, Surprise!

In a move that caught nearly everyone looking the other way, the MPC cu the OPR by 25bp yesterday (as if you could have missed this bit of news) (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 3.00 percent. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25 percent and 2.75 percent respectively….

…Looking ahead, there are increasing signs of moderating growth momentum in the major economies. Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom….

…For Malaysia, domestic demand continues to be the main driver of growth. Private consumption will be supported by growth in income and employment, and measures implemented by the Government. While investment in the oil and gas sector is moderating, overall investment is expected to be supported by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. Exports are projected to remain weak following more subdued demand from Malaysia’s key trading partners. Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects….

…inflation is projected to be lower at 2 – 3 percent in 2016, compared to an earlier projection of 2.5 – 3.5 percent, and continue to remain stable in 2017.

Overall domestic financial conditions have remained stable since the previous MPC meeting with financial markets continuing to function in an orderly manner. The risks of destabilising financial imbalances have receded….

…The adjustment to the OPR is intended for the degree of monetary accommodativeness to remain consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

I have a full slate today, so I can’t go into too much detail as to the whys and wherefores. Best I can say is that: It’s complicated. There are a lot of things going on in the data, most of which aren’t “trends” but one-offs, which makes reading the tea leaves that much harder. I’m officially declaring 2016 to be the Year of the Base Effect.

What I can say right now is that I’m uncomfortable with the MYR’s recent strength, which amounts to a  tightening of monetary conditions regardless of what BNM does. It’s also getting increasingly out of line with other oil & gas currencies like the CAD and AUD. Further MYR appreciation would, in my view, require offsetting cuts by BNM. This is all predicated on a domestic economy viewpoint of course – this isn’t about export competitiveness (aka currency wars), but rather export revenues.

There’s certainly more than a hint in the last couple of sentences of more monetary easing to come.


  1. I'm puzzled by the upward movement of MYR post the OPR announcement too. Does it mean that market is of the view that MYR is way undervalued that this offsets the effect of BNM's monetary policy?

    It will be great if you could shed some light on this.

    Thank you.

    1. @anon

      As Waihou says - it's foreign money coming in. A rate cut is bullish for the bond market (lower yields = higher prices). Because the move was a surprise and not fully priced in, you could make money by trading bonds short term.

  2. I would say it is probably due to the flowing of money from western to emerging market.