Thursday, January 6, 2011

November 2010 Monetary Conditions

I’m late with this as usual. But it’s always useful to review happenings over the last few months, especially when they’re as surprising as this data is.

In terms of the money supply, not a whole lot changed in November (log annual and monthly changes; seasonally adjusted):


M2 growth has been disgustingly stable over the last six months. The same can’t be said in terms of loan growth or in interest rates.

Yields on MGS dropped across the board in November, but especially at the short end of the yield curve:


This is partly a reflection of decreased supply, as no MGS were issued in November (though there was an issue of RM3 billion in GII in the same month), compared to RM6.6 billion in October.

What’s funny about this is that demand is primarily at the long end – October’s MGS issuance featured an oversubscription of 2.69 times for the RM3.5 billion issue maturing in Sept 2017, but just 1.62 times for the RM3.0 billion issue maturing in 2013. While this could be from the heavy issuance of shorter term maturities over the course of the recession, it’s still leaves the drop in yields a bit of a puzzle.

On the loan front, outstanding debt has continued to accelerate (log annual and monthly changes):


…as net lending rates continue to plumb new lows:

04_loan spread

That’s the lowest the spread has been since February 1998. If you’re wondering, growth has mostly been concentrated in the household sector (log annual changes):


But you’ll note that this is more a reaction from the pullback in industrial activity in the aftermath of the trade shock of late-2008. Also, mortgage and credit card loans aren’t the fastest growing loan sectors by a long shot – that honour belongs to electricity, gas & water; mining & quarrying; and education & health (log annual changes):


The big difference is of course the sheer scale of loans to the household sector, which amount to a hair over 55% of total loans:


All this makes a case for a monetary response from BNM sooner rather than later. I confess this wasn’t my viewpoint late last year – with economic activity expected to slow this year, monetary tightening shouldn’t be on the menu of policy options. But if loan growth continues to accelerate, and market interest rates stay on the low side (the interbank overnight rate averaged below the OPR throughout the last quarter, though still within BNM’s intervention band), then concerns must rise over second order effects boosting consumer price inflation.

As an illustration of BNM’s concern, BNM Bills outstanding continue remain near its all time high, with RM14 billion issued in November to cover almost all maturing issues:


Technical Notes

Data from the November 2010 Monthly Statistical Bulletin from BNM

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