Friday, May 6, 2011

MPC Statement: BNM On The Warpath

As I thought might happen, BNM has begun its second round of normalisation of interest rates (excerpts; emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.75 percent and 3.25 percent respectively…

…Global inflation has, however, increased on account of rising energy and commodity prices…

In the domestic economy, the latest indicators point towards the continued strengthening of private investment and sustained private consumption expenditure in the first quarter. The export performance also improved, supported by regional demand. Going forward, the assessment is for the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually during the course of the year. Growth will be underpinned by the firm expansion of domestic demand. Sustained employment conditions and income growth is expected to provide support to private consumption, while private investment is projected to strengthen amidst the improved investment environment…

…The assessment is that supply factors will continue to be a key determinant affecting consumer prices…There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year…

At the current OPR level, the stance of monetary policy remains supportive of growth. The future stance of monetary policy will depend on the assessment of the risk to growth and inflation prospects.

The statutory reserve requirement was raised as well, from the current 2.0% to 3.0%.

So, why increase interest rates and why now? The MPC statement indicates that Malaysian inflation is really a cost-push phenomenon; that’s something that tightening monetary policy has little traction against. But I think the key points are those that I’ve highlighted: the MPC’s worried about future inflation and future inflation expectations, and not so much current inflation.

To wit: Growth is strong enough and is expected to be sustained; domestic demand is frothy enough to increase price pressures in the future; and the current level of interest rates are too low to head this off.

Of course, a 25bp increase is hardly enough to put a cap on excess credit creation, so it’s a given that we’re going to see the OPR hit 3.5% within the next 2-3 meetings. I wouldn’t bet against 4% either – if domestic price pressures are in fact rising, then that argues for a monetary policy stance that’s actually tighter than required for sustained growth, compared to the still accommodative stance we have now:


BNM’s forecasting an average inflation rate of over 3% for the year; a neutral interest rate level would therefore be between 4%-5%, and an inflation-fighting level even higher still. If it gets that high, its going to be really painful for many households.

From an operational standpoint, raising the OPR will be pretty costly for BNM – the last round of interest rate hikes required the issuance of nearly RM70 billion in BNM bills to bring KLIBOR in line with the OPR target. We’re probably looking at another RM10-15 billion in the next few days, even taking into account the SRR increase (which costs BNM nothing).


  1. Dear Hisham,

    Based on your analysis, do you think another 25-50 basis points increase in the OPR will be able to reduce the perceived high levels of speculation in properties of hot areas such as Klang Valley and Penang?

  2. Honestly speaking, no. Would a 0.5% rate increase stop you if you thought you could make 15% p.a.? The rate increase might make banks a little more cautious about lending for speculation but that's it.

    In fact, I can't find a relationship between interest rates and unit sales in the residential property market.

  3. Personally, I think some more aggressive steps like enforcing 50% cash down payment for 2nd house and higher taxes on short term speculation should be taken to allow genuine home-buyers a chance. I believe enforcing a 30% down payment on the 3rd house is just pure window-dressing.

    Implementing policies like "My first home" is not going to help genuine home-buyers in the Klang Valley as most houses are already priced beyond the RM220,000 range. On top of that, it probably adds to the danger of excessive household debt, especially among the fresh graduates and low income earners. Anyone who believes that house prices will "always" go up should remember Hong Kong in 1998 and the US in 2007.

  4. The increase of 0.25% will have no effect on the property market. The Singapore intervention of sellers stamp duty (SSD) will have much better effect in cooling the market. In Singapore if you sell your property withing 1 year you pay 16% stamp duty on the sale price, if sold within 2 years then the stamp duty is 12% and so on sliding scale. Let us have such intervention and I can see speculators exiting the Klang valley market and return of genuine buyers

  5. @anon 9.45

    As I recall, Singapore's inequality problem is just as bad as Malaysia's. The SSD sounds a little like what RPGT used to be, although it appears more punitive because it's levied on the gross sales price (is it?), rather than net gains. I'd prefer the latter as being more equitable, but I agree that something along those lines would be better than a blanket increase in lending rates.

  6. Agreed. A tax on capital gains or higher stamp duty on sales price is a more surgical measure to tamp down speculation.

    Correct me if I'm wrong. The RPGT is based on the date you signed the S&P? So a buyer who signed on S&P w/ developer May 2011, receiving VP in May 2014, and upon VP, does a name transfer, his RPGT falls under the sold after 3 yrs rather than considered sold after < 1 yr.

    Coupled w/ DIBS (Developer Interest Bearing Scheme), a rise of 1% in interest rate is nothing. Because I don't even have to service loan interest in that 3 yrs it is being built in the first place.

    RPGT don't touch them (much) and interest rate hike don't touch them at all.

    But it hurts ppl like me who are servicing a loan for a humble mid-low cost apartment.

  7. I've no idea with respect to RPGT - I better find out LOL. I'm thinking of selling off my condo unit in the next few years.

  8. Ahah hisham. You're excluded from RPGT if you sold after 5 yrs from S&P.

    RPGT is for 30% (on gains) for 1st yr, gradually reducing until 5% for sale after 4-5 yr of S&P.

    But am I right in saying interest rate hike is not felt by people who bought using DIBS?

  9. DIBS (Developer Interest Bearing Scheme)

  10. Even if there's an increase, it shouldn't amount to much. I think the consensus is that this hike won't effect the property market much if at all.