Yesterday’s MPC statement is about as clear a statement of intent as you can get from a central bank (excerpt; emphasis added):
...At the current level of the OPR, the stance of monetary policy remains accommodative. Given the strength of the global and domestic macroeconomic conditions, the Monetary Policy Committee may consider reviewing the current degree of monetary accommodation. This is to ensure the sustainability of the growth prospects of the Malaysian economy....
As promised, the MPC didn’t make a move yesterday (excerpt; emphasis added):
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 expand at a moderate pace…Going forward, downside risks to global growth remain high following uncertainty over the growth momentum and policy shifts in major economies, and unresolved issues post the EU referendum in the United Kingdom.
For Malaysia, growth moderated slightly in the second quarter of the year, following weaker net exports and a drawdown in stocks…Going forward, private consumption will remain supported by wage and employment growth, with additional impetus coming from announced Government measures to increase disposable income. Investment activity will continue to be anchored by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. On the external front, export growth is expected to remain weak following subdued demand from Malaysia’s key trading partners. Overall, the economy is projected to expand within expectations in 2016, and to remain on a steady growth path in 2017….
…At the current level of the OPR, the degree of monetary accommodativeness is 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.
Translation: That’s all…for now.
Having said that, I’m looking for another cut before the end of the year. My base case this year has always been for stronger second half, due to the minimum wage revision, civil service pay hike, EPF contribution cut, and now, from the last OPR cut. Private consumption is likely to be strong this year, especially as we get past the base effects from GST implementation last year.
However, the numbers coming out from the government suggests a much stronger pullback of government spending than I expected to happen. Revenue for the first half of the year was much weaker than I thought it would be, which makes things in the second half even dicier, what with the full impact of the crash in oil and gas prices earlier only now hitting revenues. There’s a lot of pressure on MOF to pull a rabbit out of its hat to hit the 3.1% deficit target, and while they can perform seeming miracles (e.g. the spectrum auction), there’s always a tradeoff involved.
That, and the budget speech next month, will bear watching.
In any case, weaker public consumption and investment could force the MPC into action. Not deliberately mind, just that the downdraft from lower government spending would turn up as weaker than expected economic growth, which should start showing up in the numbers when the MPC meets for the last time this year, in November.
At the risk of getting a phone call from across the road, here’s what I think of last week’s 25bp OPR cut:
1. Surprise!
One of the reasons the move came as a surprise to the markets and everyone else was that it was not telegraphed beforehand. Nobody got a hint of any change in policy, right up to the announcement. On the one hand, this breaks with recent practice around the world, where guidance is given so that markets adjust in a relatively orderly fashion. On the other hand, if you believe in the neutrality of money and rational expectations, surprise changes in monetary policy are the only changes that work. More on this in a bit (see point 5).
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):
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….
Throwing this out there because this is a narrative that really ought to change:
In the runup to BNM’s latest MPC, there was a lot of market speculation that BNM should cut the OPR, because the numbers appear to justify it (lower credit growth, poor business and consumer sentiment, slowing GDP growth etc). In fact, even as the MPC stayed on hold, there continues to be opinions out there that a rate cut is and should be in the offing, with some thinking that the weakness in the MYR vis-a-vis the USD is what’s holding the central bank back from easing monetary policy.
Under different circumstances, I’d fully agree that monetary policy should be loosened. But I think in the present case, the narrative should be turned on its head, as I think the causality runs the other way.
The quote comes from Scott Sumner, and I’m not using it in the original sense (identifying causality in a supply-demand equilibrium), but there’s a certain truth to it when applied to monetary policy.
There’s a lot of speculation in the market right now that Bank Negara will cut interest rates in the next two meetings of the MPC, largely because (1) political pressure and (2) the coming drop in inflation. I think (1) is nonsense (I see no evidence of it, nor have I heard anything), and (2) is mistaken.
This post is about point 2.
Yesterday’s MPC decision came as no surprise, with the OPR held steady at 3.25% (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.
The global economic expansion remains moderate, with divergent growth momentum across economies in the first quarter of 2015…Downside risks to this outlook, however, continue to persist. In this environment, the international financial markets will continue to be affected by shifts in global liquidity and investors sentiments.
As expected, the Monetary Policy Committee meeting yesterday left the Overnight Policy Rate unchanged at 3.25% (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….
…the downside risks to the global economic outlook remain given the weak growth momentum in a number of major economies. The uncertainties in the policy environment are also contributing to the shift in sentiments in the international financial markets.
While the Malaysian financial markets have been affected by these global developments, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets….
…Going forward, domestic demand will remain as a key driver of growth…household spending will continue to be supported by the steady increase in income and employment.…The prospects are therefore for the Malaysian economy to still remain on a steady growth path….
…For the rest of the year, headline inflation is expected to trend higher, but to be below its historical average….
…At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity….The MPC will also continue to monitor the risks of destabilising financial imbalances to ensure the sustainability of the overall growth prospects.
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.
Yesterday’s MPC statement came in more hawkish than expected (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….
…Volatility in the international financial markets has increased amid shifts in global liquidity and heightened uncertainty particularly with regard to global growth prospects and the decline in commodity prices….
More or less as expected by just about everyone, yesterday’s MPC meeting has the OPR still on hold at 3.25% (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.
It was a coin toss and tails it is (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….
…For Malaysia, economic activity has been supported by the continued growth in domestic demand and exports…While private investment activity is projected to remain robust, private consumption is expected to moderate…The prospects are for the Malaysian economy to remain on a steady growth path.
…Inflation is expected to remain relatively stable for the remainder of the year. Going into next year, inflation is projected to edge higher and is expected to be above its long-term average due to domestic cost factors….
The current stance of monetary policy remains supportive of growth…Further adjustment to the degree of monetary accommodation may be taken depending on how new information will affect the assessment on the balance of risks….
First off, I have NO idea what BNM is going to do today. I have decided opinions on what they SHOULD do, but there’s a striking divergence of opinion in the market about this.
So here’s the situation – the MPC decided in July that with growth looking robust, it’s time to normalise interest rates and head off the risk of “financial imbalances”, which could mean anything from excessive borrowing by firms and households, or an imbalance in net foreign asset holdings, or pretty much anything really. I didn’t agree with the decision then, and I still don’t.
It was so blatantly telegraphed after the last MPC meeting, the disappointing thing would be if they didn’t go through with it (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively....
The CPI numbers for April were released late on Wednesday, and they point to benign inflationary pressure (log annual and monthly changes; 2000=100):
The annual change is still high, but the monthly growth numbers show the impact of price hikes of subsidised goods has dissipated away, showing little in the way of any pass-through into other prices.
A little stronger than I thought it would turn out to be, but not too much so (log annual and quarterly saar changes; 2005 prices):
Don’t go overboard though – the quarterly growth numbers tell the real tale. 1Q2013 was a really horrible quarter, which means growth for 1Q2014 will flatter to deceive. Note that 1Q growth was stronger in 2011 and 2012, but weaker in the last couple of years (including this past quarter).
Last week’s Monetary Policy Committee statement made very clear that policy tightening of some sort or another is on the way (excerpt; emphasis added):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.
Global growth moderated in the first quarter with several key economies affected by weather-related and policy-induced factors. Looking ahead, the global economy is expected to remain on a path of gradual recovery….
…For Malaysia, latest indicators suggest that the domestic economy continued to register favourable performance in the first quarter. Going forward, growth will remain anchored by domestic demand with additional support from the improved external environment….
…Inflation has stabilised in recent months amid the more favourable weather conditions and as the impact of the price adjustments for utilities and energy moderate. Going forward, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.
Amid the firm growth prospects and inflation remaining above its long-run average, there are signs of the continued build-up of financial imbalances. While the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances. Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.
The key paragraph is the last one, with its ominous warning of “degree of monetary accommodation may need to be adjusted”. That’s about as clear a signal as can be given.
Surprise, surprise…not (excerpt):
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent….
…In recent weeks, shifts in global liquidity have resulted in increased volatility and uncertainties in the international financial markets….global economic and financial conditions remain vulnerable to shifts in sentiments and heightened volatility in the international financial markets.
The outcome of yesterday’s Monetary Policy Committee was as predictable as the day – which is of course, a good thing. If things were actually interesting, something bad would have been happening (excerpt):
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 improve at a moderate pace…Looking ahead, there remain considerable risks that could affect the pace of the global recovery.
In the Malaysian economy, the expansion in domestic activity was supported by improvements in exports…Going forward, the growth momentum will benefit from the expected improvement in the external sector amid some moderation in domestic demand. Domestic investment activity will however continue, led by private sector capital spending and the ongoing implementation of infrastructure projects. Domestic demand is expected to moderate, reflecting the public sector consolidation and some moderation in private consumption. Uncertainties in the global environment may also affect the overall growth momentum.
Don’t think anybody expected anything more (excerpt)
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 experience modest growth...Although global monetary conditions remain highly accommodative, market uncertainties on the direction of policy have resulted in substantial volatility in global financial markets. The reversal of capital flows from the emerging economies following a prolonged period of strong inflows has resulted in the depreciation of emerging market currencies.
In the Malaysian economy, domestic demand has continued to support growth amid the weaknesses in external demand. Going forward, economic growth is expected to be underpinned by the continued expansion in domestic activity...The impact of subsidy adjustments on consumption spending is expected to be contained by targeted financial assistance. Domestic investment activity which has been robust will continue to be led by capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects. Overall growth prospects, however, could be affected by risks in the global economy and international financial markets...
...Going forward, inflation is expected to increase in the remainder of the year and into 2014 resulting from domestic cost factors, including subsidy adjustments...
...In the MPC’s assessment, there are increased uncertainties to the balance of risks surrounding the outlook for domestic growth and inflation...
Nominal GDP growth has been poor, but there’s a potential for a turnaround with higher oil prices, which could boost prices all around. We’re also seeing slower growth in credit and in the money supply. If anything, the bias to policy should still be on the downside – I don’t think the MPC is going to be panicked into doing something silly like trying to “defend” the currency. Currency weakness in fact plays into BNM’s hands, by lowering relative prices and a de facto loosening of monetary policy, even if the primary policy instrument is not adjusted.
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