Tuesday, July 5, 2011

May 2011 Monetary Conditions

May was an odd month. Looking at the money and interest rate data, it’s hard to get a clear sense for what’s going on, because of the anomalies in the data. Take money supply growth (log annual and monthly changes;m seasonally adjusted):


Even as BNM began another tightening campaign, which appears to have impacted M1, broader money supply growth defied gravity and continued to accelerate. Monthly changes in M2 sustained at a pretty high growth level of close to 2%.

Interest rates weren’t behaving nicely either:


Despite the rise in the OPR, interbank overnight rates were consistently at the lower end of BNM’s intervention band, and below the OPR target. I’ll cover what I think BNM’s doing in a separate post, as this is just one anomaly among a few.

Yields on MGS were a bit more predictable:


One year MGS yields responded by rising to hair under 3%, and yields for maturities under 10 years generally rose. It helped that the government started borrowing again in May, after April’s redemption binge.

More troubling for the Monetary Policy Committee to consider is credit expansion, which continues to accelerate (log annual and monthly changes):


The bulk of the increase is coming from business loans as growth in lending to households has been gradually trending lower over the past year (log annual changes):


Part of the problem is that despite the hike in the OPR and higher interbank rates, there’s been little actual pass through of the increase into actual lending rates:


That means the monetary policy traction is slipping – if increases in the overnight interbank rate are only partially being fed through into lending rates, the central bank will have to be far more proactive in policy making than they’re used to being.

The bottom line here is I think another rate hike of 25bp is inevitable after tomorrow’s MPC meeting. Neither loan growth nor the money supply are responding to the last hike, core inflation is past the 2.0% level, the labour market is tight, and the whole scenario is complicated by reduced effectiveness of BNM’s main policy instrument. Even as the short term growth outlook has darkened, the immediate concerns are in heading off accelerating consumer and asset price inflation down the road. The indicators are much more clear on that now than they were two months ago.

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