Tuesday, December 6, 2011

October 2011 Monetary Conditions

Money supply in October was a little schizophrenic – M1 growth rose sharply from higher demand deposits, but M2 growth dropped from lower FDs (log annual and monthly changes; seasonally adjusted):


There’s a little less liquidity in the system, shown by BNM not rolling over some outstanding bills (RM millions):


Forex turnover remains high (RM millions; log annual changes):


…but interestingly enough, we’re not looking at capital flight from the Euro crisis here, as international reserves have continued to climb (RM millions):


And it isn’t a revaluation of the reserves in ringgit terms either, as BNM only revalues reserves on a quarterly basis, while most of the increase has been in October, i.e. past the 3Q revaluation date.

Juxtaposing that with the banking system’s forex deposits (RM millions):


…and it looks like BNM conducted some mild intervention in October. As to why, I can’t guess – perhaps they have a ratio target for international reserves (external liabilities? import cover?).

On the interest rate front, interbank rates have held steady and even have softened a little:


…as have yields over the medium term:


Note that yields over the longer term (10 years and up) have been rising a bit over the last few months, which is causing the MGS yield curve to kink and steepen a bit:


Credit conditions remain pretty good (log annual and monthly changes):


…and loan demand remains high:


In contrast to last month though, October’s disbursements were mainly to the household sector. Still, we’re looking at sustained higher growth in lending to non-households, rather than a faster buildup of consumer credit (log annual changes):

10_loan sectors

Growth could be a lot faster, but banks aren’t falling over themselves trying to give out loans (even if they seem to advertise and market that way) – nearly half of all loan applications are rejected:


This despite loan margins getting increasingly thinner:


Bottom line: I don’t see any clear argument here – from present monetary data at least – for a rate cut, despite the turmoil in European markets and the threat of a generalised global economic slowdown. Inflation, to me at least, is still uncomfortably high and there’s no evidence from the markets or from real economic activity that the economy is retreating.

Looking forward, the future is murky – it depends a great deal on a resolution of the Euro debt crisis and avoiding a hard landing in China. US data is encouraging on the other hand, and Japan is slowly climbing out of the mess created earlier this year by the tsunami; corporate profits, even in Europe, are running at a record pace of growth.


  1. On banks not giving out new loans despite low margin, the L/D is pretty high already. I don't think banks have so much space to give out more loans. (because of this, I think application indicator is less useful than usual as an leading indicator. Also, time for rate hike! We right now have pretty much 0 or negative real interest rate)

    So, banks are stuck in between low margin and high LD. Banks basically can't go anywhere now.

    On top of that, business loan went down. IIRC, that drop in total loan was due to business loan drop.

    All in all, I think this is a sign of slowdown. Still early, but we're already at the peak, external factors aside.

  2. Hafiz, the LD ratio is not a constraint on individual bank lending. With international capital mobility, it's not even a constraint on the banking system in aggregate (though it would be at a global level).

    You're thinking in terms of an exogenous money supply, but money is actually endogenous - every loan is its own deposit.

    A higher LD ratio would signal vulnerability to liquidity shocks, but that's about it. When I worked in banking a decade and a half ago, the institution I was working for had an LD ratio in excess of 130% but loan growth was still in the double digits.