Tuesday, July 19, 2011

BNM “Unpredictable”

From a Business Times report  yesterday (published in full):

Bank Negara Malaysia 'most unpredictable'
By Rupa Damodaran

Kuala Lumpur: Ever wondered which is the most predictable central bank in Asia as far as monetary policy rate decisions are concerned?

It is Bank Indonesia (BI), said Credit Suisse economist Robert Prior-Wandesforde in a report. And the least predictable central bank? Bank Negara Malaysia.

Credit Suisse compared the decisions of the seven central banks from Indonesia, the Philippines, Thailand, Taiwan, Malaysia, South Korea and India, based on their monetary policies from 2006.

Comparisons were also made on whether the policies were dovish (preferring low interest rates) or on the contrary, hawkish.

China, Hong Kong and Singapore were excluded as China does not have a published meeting schedule, while Hong Kong and Singapore do not operate an interest rate policy.

He said the Bloomberg consensus made least errors predicting Bank Indonesia's rate decisions, despite the fact the Jakarta-based bank made by far the highest number of rate changes over the period.

If Indonesia's central bank does surprise, it is most likely to be in a dovish direction.

"Bank Negara Malaysia has been the least predictable central bank in the way we have calculated it here, with the consensus wrong more than 25 per cent of the time," Prior-Wandesforde said.

The Bank of Korea is one that most likely to surprise the market in a hawkish direction.

Of the seven central banks it looked at, five have delivered between 16 and 21 interest rate moves over the period - which is considered a surprisingly high degree of consistency.

"With policy interest rate decisions becoming more finely balanced in many Asian countries, not least because of the ongoing shenanigans in the euro zone, we thought it would be useful to assess the predictability of the various central banks in the region," he remarked in his reason for the assessment.

One of the biggest surprises for the market was when Bank Negara decided not to hike rates during soaring inflation in 2008 and subsequently in April 2010 and again in May this year.

Bank Negara has been "comfortably the least active central bank in the region", while its Overnight Policy Rate has moved in a range of just 125 basis points (between 2.25 per cent and 3.50 per cent) during the volatile period for Malaysia and the world.

He also noted that despite Bank Negara's relative inactivity as far as interest rate changes are concerned, Malaysian inflation has been among the least volatile in the region.

Unpredictable? Really? Smile

But I believe that the causality implied in the last paragraph should really be the other way around – if inflation has not been volatile, that would lead to less central bank activity.


  1. http://is.gd/UZffvv

  2. i think they've been quite transparent with their intentions.. govnr zeti said in ldn that mkt should not read too much into inflation..just 1 week prior to the mpc...was clear enough that growth worries took the front stage to inflation....

  3. Walla, thanks!


    I think it's really relative. The CS report cites a 25% forecast error rate on BNM moves, which isn't really that bad. And note that based on orthodox economic theory (i.e. non-monetarist), only unpredictable monetary policy moves have any "real" impact, and not just nominal changes in prices. So there's some justification for BNM to be a little coy about what they're going to do.