December 2011 Consumer Prices

I’ll be quite busy until the end of next week – as much as taking as break as adjusting to a new working environment (moving jobs!). So postings will be a bit sporadic until I settle down, hopefully before the end of January.

On to last month’s CPI numbers, released yesterday: inflation slowed in December 2011 as core prices actually dropped while increases in food and transport costs slowed (log annual and monthly changes; 2000=100):

About half the marginal increase in prices in December came from one category alone, food (log annual and monthly changes; 2000=100):

Even then, December’s food price increases in aggregate were about the average for the last couple of years. Most of the impetus came from seafood, which was up 9.1% on the year, and 2.3% on the month.

Now the multi-billion ringgit question is: will this moderation in inflation give BNM room to cut interest rates? Yes, I believe it does, though it depends on whether they think it necessary.

Going by the feeling in the market and the numbers being batted about by analysts, expectations of GDP growth going into 2012 are still pretty poor. That may prompt a proactive cut in the OPR at the next MPC meeting, which is a little less than 2 weeks away. Historically, BNM hasn’t been shy about allowing real interest rates (nominal interbank overnight interest rates less CPI inflation) to turn negative – growth is obviously a bigger part of their mandate than price stability.

Based on the numbers as they stand now, I honestly think it will be a close call – I’m wavering over whether a 25bp cut would be justified this month, though I think if there isn’t the chances of a cut at the next meeting in March would go up. There’s enough room to cut the OPR by at least 50bp this year – possibly more if inflation continues to moderate.

Bear in mind that even in 2009, the OPR was only cut to 2.0%, and unless growth totally tanks, I don’t see this level being revisited.

Is there an argument for keeping interest rates at the current level? Yes, there is – loan growth is pretty solid, lending rates haven’t really followed interbank rates higher (incomplete non-existent pass through) and the Ringgit is generally weaker than it was in early 2011. The output gap is closing, and capacity utilisation rates (from what I’ve seen) are actually higher than they were before the 2009 recession. That argues for raising interest rates, not cutting them.

But monetary policy has to be forward-looking, not backward looking. On that basis, my cloudy crystal ball says the bias should be towards staying pat or cutting. If I had to bet, I’d say a 25bp cut over the next two meetings, and then see how the economy responds.

Technical Notes:

December 2011 Consumer Prices Index report from the Department of Statistics