Friday, January 28, 2011

BNM Signalling No Hikes Ahead

Yesterday’s MPC statement was as bland as they come, until the very last line:

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 2.75 percent...

…At this stage, the MPC considers the current monetary policy stance as appropriate and consistent with the current assessment of the economic growth and inflation prospects. The stance of monetary policy continues to remain accommodative and supportive of economic growth. However, the large and volatile shifts in global liquidity are leading to a build up of liquidity in the domestic financial system. While the liquidity in the financial system has been manageable, going forward, additional policy tools such as the statutory reserve requirement and macroprudential lending measures may be considered to avoid the risks of macroeconomic and financial imbalances.

What that says to me is that BNM won’t consider using a sledge hammer to whack a fly – unless there’s evidence of a systemic change in aggregate price picture. I think the SRR will be used as a signalling measure, telling the markets that BNM is considering tightening further. It’s pretty much a paper tiger at the moment, given the current SRR level (1%) and the banking system’s actual reserve ratio (15%).


  1. " BNM won’t consider using a sledge hammer to whack a fly " -- could you please elaborate on this. Do you imply that the OPR is a blunt instrument as compared to SRR? And what s your view regarding the MPC in march. Hike or no hike based on your inference of the statement. Thanks.

  2. It doesn't look like they're going to change the stance in March either, from my reading of it.

    From the statement, they're worried about excess liquidity in the banking system, which could lead to excessive credit growth.

    Because using the OPR means that BNM doesn't directly control the money supply, it's possible to have excess or deficient liquidity conditions at any given rate of interest. So raising the SRR means they can reduce liquidity in the system without using open market operations that would cause a deviation of interest rates from the OPR target.

    Changing the OPR target would change the whole term structure of interest rates not just for the banking system but for PDS as well, not to mention the implications for the exchange rate. There's simply no call for an economy wide change in interest rates just yet.

    But as I said, based on the current situation, changing the SRR will be more a signalling of BNM's future intentions rather than anything with real teeth. Effectively, it's just a transfer of money from one liability category (deposits of FIs with BNM) to another (stat reserve).

  3. Hisham, I wonder if you have any insights into the apparent dichotomy between the stats which show that our banking system if flush with liquidity and the promotions banks are/were running to bring in new deposits.

  4. Essentially, it's about liquidity risk management. The capital flows coming in are "hot" - it's invested in the money and capital markets and can leave any time. Retail deposits generally stay put. BNM requires local banks to adhere to certain liquidity maturity ratios - they must be getting short of longer duration deposits.

  5. Sekali lagi Nazir Razak mahu mencuri dari orang Melayu yang kebanyakannya ahli LTAT dan Tabung Haji.

    Setelah menipu syarikat2 PNB kononnya merger dengan Synergy boleh membawa keuntungan tetapi nyata terbukti kerugian 2 billion.

    Yang penting bagi lanun ini adalah komisen 300 juta dari merger syarkat PNB biar orang Melayu kerugian.

    MACC perlu siasat merger Sime Darby kerana tidak masuk akal dan ternyata bodoh.

    Sekarang Nazir Razak mahu makan bank orang Melayu yang di wakili LTAT.

    Jangan biarkan. Buang Najib RAzak jika perlu. Ucapan berapi2 Najib adalah hanya untuk membuka ruang adiknya mencuri dari orang Melayu.

    3:59 PM

  6. Actually, the Sime merger made sense to me then and still makes sense to me now. While I certainly doubt that Sime actually made the estimated operational savings of around RM400m per annum, you can't argue with the facts:

    Market value of Sime Darby, Guthrie and Golden Hope before the merger: RM26 billion.

    Current market value of the combined company based on Friday's price: RM55 billion.

    Sime's losses would have happened with or without the merger as they were the legacy of the old Sime Darby operations - why investigate the merger exercise, when it had nothing to do with the losses?

  7. Ur referring to the Market Cap of RM 55 bil compared to pre-RM 26 bil?

    What would be the MktCap of the three if they are not merged?>> easily RM 100 bil NOW.But then MC is not the essence of life except for speculators..

    What is the true value creation of the merger? cost lower?is tech shared?is operations improved?R financials stronger?Has branding become clearer?

    The truth is..NO.So its a negative.
    The problem is because the post merger integration was not focussed everything in Msia..the pre merger drivers either quickly cashed on the success (for new high paying jobs) or mafde enough to retire.

  8. Apologies for the late reply, as I've just got back from my CNY break...but:

    "What would be the MktCap of the three if they are not merged?>> easily RM 100 bil NOW."

    Care to substantiate this? A RM100 billion valuation implies a nearly 100% annual increase in the share prices of these companies. That's hard to believe. I visited all three companies pre-meger, and nothing in what they were doing could boost their value that much.

    I'm as leery as you are about the financial or business benefits of the merger (or any merger - from painful experience), but the matter remains that investors have assigned a permanently higher valuation to the merged entity, for which there are solid reasons - the index effect (greater size causes higher valuation), reduction in the conglomerate discount, potential (if not real) rationalistion.

    "like everything in Msia..the pre merger drivers either quickly cashed on the success (for new high paying jobs) or mafde [sic] enough to retire."

    The merger impetus came from PNB, not from CIMB IB or the companies themselves, which is where I disagreed with the original anon poster. Hence I don't understand your comment here.