BNM Watch: On The Move

The OPR was hiked 25bps today to 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to increase 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 global economy has strengthened further, with growth becoming more entrenched and synchronised across regions…Global growth is projected to experience a faster expansion in 2018. In this environment, risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion.

For the Malaysian economy, latest indicators reaffirm the strength in exports and domestic activity. Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy….

…However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate….

…With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation. At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time. At the current level of the OPR, the stance of monetary policy remains accommodative….

After the strong signal given at the last MPC meeting in November, BNM fulfilled market expectations with this move. Up to last week, I think the bond markets were still in two minds whether this would happen, having only half priced it in. Regardless, foreign investors were in no doubt, judging by the moves the Ringgit has made over the past couple of months.

Personally, I think this is the right move – the data certainly supports a tightening of monetary conditions, even if the appreciation of the Ringgit makes it appear unnecessary. The problem with playing the expectations game is that if you don’t follow through, the markets might reverse course and make it necessary again. For practical purposes, monetary conditions started tightening right after the release of the last statement, and not raising the OPR today would have undone that. Borrowers will have to start paying more on their loans from next month, but that would be the only difference. Granted, that’s maybe RM2 billion or more off the table in private consumption and investment, but that’s in the context of a faster growing economy.

Speculation will now shift to if and when there will be another hike. Nothing in the statement suggests one is on the cards for the moment, but the “pre-emptive” line at the end indicates BNM will be keeping an eye out for an acceleration of loan demand. I think the data would support a further move in the second half of the year, though that might be skewed by spending around the general election, which I think will probably come in March. Provisionally, I’m not expecting any consideration of further tightening until September at the earliest.

Market Monetarism Goes Mainstream

David Beckworth summarises who’s bought the idea of NGDP targeting (excerpt):

Do Changes in Potential Output and Data Revisions Make NGDP Targeting Impractical?

Over the past few months there has been increasing chatter about the need for a new framework for U.S. monetary policy. The Peterson Institute for International Economics (PIIE), for example, recently had its Rethinking Macroeconomic Policy conference where, among other things, Ben Bernanke called for the Fed to adopt a temporary price-level target. PIIE also launched Angel Ubide's new book on reforming monetary policy. Similarly, at the AEA meetings there was a session titled Monetary Policy in 2018 and Beyond where Christina Romer again made the case for a NGDP level target. Likewise, the Brookings Institute held a recent conference on whether the Fed should abandon its 2 percent inflation target. There, Jeff Frankel shared the arguments for a NGDP level target and Larry Summers endorsed it. Others at the conference, like San Francisco Fed President John Williams called for a price level target.

I am glad this conversation is happening. It is not new--some of us have been having it since 2009--but I get the sense that it is gaining traction. The turnover at the Fed and the opportunity it creates for new thinking makes this conversation about new monetary policy frameworks incredibly important now.

As this conversation continues to grow, so will the interest in the options available including nominal GDP level targeting (NGDPLT). Obviously, I have much to say here, but for now I want to respond to two critiques often applied to NGDPLT: (1) changes in potential output and (2) data revisions make NGDPLT an impractical rule to implement. I think these concerns are misplaced as explained below.

I’ve liked the idea of market monetarism from the start – it’s intellectually appealing, simple in implementation, and really, just common sense. I do have some reservations, though not the ones David brings up.

My main concern is the choice of growth path, especially when viewed through the lense of a developing economy versus a developed economy, as well as how such a path might evolve for an economy across time. That might not seem like much, given that a central bank no longer has to target a lagged reported variable (inflation) and an unobservable one (the output gap). Inflation and real growth can vary under the limits of the central bank’s growth target. So far so good.

But what governs the choice of the NGDP growth path? NGDP growth of 4%-5% would more or less be compatible with developed economy growth like the US, but what about Indonesia or Vietnam, where nominal growth is typically in the region of 8%-9%?

Second, should that target change as economies converge to the global production possibility frontier, and potential growth rates drop? It’s one thing to have inflation averaging 2% over time, but quite another to have it average 6% or more.

Third, what about the impact of demographic change? As populations age, the dependency ratio rises, and both nominal and real income and consumption growth will naturally slow. How should a NGDP growth rule respond to this? I think for this last point, any such monetary rule should target NGDP per capita or NGDP per worker, rather than NGDP. But I don’t have much of  feel for the solutions to problems 1 and 2.

Nevertheless, we’re seeing real progress here.

BNM Watch: The Countdown Has Started

Yesterday’s MPC statement is about as clear a statement of intent as you can get from a central bank (excerpt; emphasis added):

Monetary Policy Statement

...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....

Historical Revisionism: The MYR and SGD in the 1980s

I came across this a couple of weeks ago, but didn’t have time to address it then (excerpt):

A kleptocracy premium for the ringgit
P Gunasegaram

A QUESTION OF BUSINESS | Without a doubt the ringgit is historically rather weak even if the economy still continues to grow at a relatively healthy pace – the latest figures show a good growth of 5.8% for the second quarter of the year….

…So why does the ringgit remain weak, trading at levels which are weaker than at the height of the 1997/98 Asian financial crisis? What is it that is happening that keeps the ringgit level depressed? Perhaps it is due to a risk premium on the ringgit following the emergence of kleptocracy (re: 1MDB where as much as RM40 billion could be at risk, as thieves dip their fingers into money borrowed by a government company via bond issues) or apprehension over the ongoing spate of mega projects (re: the RM55 billion East Coast Rail Link whose cost may go to over RM100 billion….

In the Shadow of the Hegemon

David Beckworth thinks the Fed is the global central bank (excerpt):

The Monetary Superpower: As Strong As Ever

[A] defining feature of the US financial system is that its central bank, the Federal Reserve, has inordinate influence over global monetary conditions. Because of this influence, it shapes the growth path of global aggregate demand more than any other central bank does. This global reach of the Federal Reserve arises for three reasons.

BNM On Hold (Again)

As promised, the MPC didn’t make a move yesterday (excerpt; emphasis added):

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 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.

5 Thoughts on the OPR Cut

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).

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….

Ramadhan Ruminations

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.

Close But No Cigar

You’re nearly there Tan Sri, just a little bit further (excerpt; emphasis mine):

The alchemy of money
BY ANDREW SHENG

…When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

Never Reason From A Price Change: Inflation Edition

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.

The Difference Between Quantitative Easing and Helicopter Money

I just read a report from a major international bank this morning(who shall remain nameless) that claimed helicopter money was already being implemented in a few countries, herein defined as monetary financing of fiscal deficits.

This is wrong, and they’re confusing quantitative easing (QE) with helicopter money (HM). The difference between the two is more than just semantics, despite the superficial similarities between the two in largely involving central bank buying of government bonds.

The easiest way to show this is via an example. Let’s say the private sector has $100. The government wishes to borrow $50 to finance its spending. So the private sector buys $50 worth of government bonds, the proceeds from which the government uses to spend on goods and services. But that money goes back to the private sector, so the asset side of the private sector balance sheet now reads $100 cash and $50 in bonds. The private sector balance sheet has expanded, as has the government’s.

Now that we’ve set the stage, we can work out how QE and HM affects the economy.

Changing The Reserve Ratio ≠ Changing Monetary Policy

Or, Part Three of Why I Feel Snarky This Week

A few weeks back, Bank Negara cut the Malaysian statutory reserve ratio by 0.50%, and the People’s Bank of China did the same thing last week. Most of the commentary was along the lines of “easing monetary policy” and “adding to stimulus” and “boosting lending and investment”.

That’s a load of bull.

I’ve had to explain this multiple times over the past few weeks, so rather than having to do it all again, I thought I might as well write it out.

Exchange Rates Are Relative Prices: China Edition

Or Part Two: The Real Reason Why I Feel Snarky This Week

Last week, an article by Prof Xiao Geng and our very own Tan Sri Andrew Sheng appeared on Project Syndicate (excerpt):

China’s Lonely Fight Against Deflation
…the current battle over the renminbi’s exchange rate reflects a tension between the interests of the “financial engineers” (such as the managers of dollar-based hedge funds) and the “real engineers” (Chinese policymakers).

Foreign-exchange markets are, in theory, zero-sum games: the buyer’s loss is the seller’s gain, and vice versa. Financial engineers love speculating on these markets, because transaction costs are very low and leveraged naked shorts are allowed, without the need to hedge an underlying asset. The exchange rate, however, is an asset price that has huge economic spillovers, because it affects real trade and direct-investment flows....

This is a mix of a witch-hunt, denial of economic theory and reality, flawed analysis, and historical revisionism. It's perhaps a blessing (and telling) that this appeared under the business and finance section, and not under economics.

Mexican Two Step

Last week, Banco de Mexico and the Mexican government delivered a double whammy to the financial markets (excerpt):

Mexico Battles Emerging-Market Bears With Surprise Peso Defense

The Mexican government’s unprecedented steps to protect the peso are off to a good start.

The currency posted its biggest rally in five years Wednesday after officials said they will increase the benchmark interest rate, reconfigure an intervention program to contain volatility and reduce government spending. It advanced another 0.5 percent on Thursday. The new measures came after the peso plunged 8.9 percent to start the year, the worst performance among major currencies, and was down 31 percent over the past 18 months as investors sold off emerging-market assets.

Low Interest Rates: It Isn’t Just QE

We’re nearing Fed “liftoff” with a better than 50% chance that the US Fed Funds Rate will rise above 0%-0.25% for the first time since 2008. But even taking into consideration the extraordinary monetary accommodation conducted by the major advanced economy central banks, interest rates globally have been in secular decline for very nearly 50 years, since the heyday of stagflation in the 1970s.

Money printing doesn’t half explain what’s going on.

What To Do About The Ringgit

My advice to BNM and the government, not that they need it, would essentially be the following:

Monetary Policy and the Yuan

In a shock move yesterday, the PBOC announced a sharp downward revision in the Yuan’s reference rate, with another one coming today. This de facto devaluation has had repercussions across the world, with some speculating that it would even put the Fed off from raising interest rates in September. It’s certainly the catalyst for the Ringgit moving past RM4.00 to the USD this morning.

There’s all kinds of speculation as to why (the devaluation I mean). Off hand, I would say the notion of currency war and regaining trade competitiveness is grossly mistaken. With regionally distributed production chains, the impact of FX changes on competitiveness have gradually been disappearing.

BNM Watch: No Change, And Don’t Expect Any

Yesterday’s MPC decision came as no surprise, with the OPR held steady at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 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.

The Facts Of Life: Singapore’s Monetary Policy And The SGD Exchange Rate

Since the Ringgit has recovered (a little) there’s probably less of a need for this post. But given how angst ridden Malaysians are about Singapore and the Singapore Dollar (one commentator described it as humiliating), it’s probably still appropriate.

So here’s my take on this subject, and given how TDM is in the news so much these days, done “che det” style:

1. Once upon a time, the SGDMYR exchange rate was at parity. Now however, SGD1 buys MYR2.67. This is popularly viewed as a barometer of how badly the Malaysian economy has done vis-a-vis Singapore.

2. However, this would only be true if the SGD was a free floating currency. It is not; it is in actuality a policy variable.