Friday, March 8, 2013

BNM Watch: No Change…Again

The language has shifted a little, and a bit more cautiously optimistic on the external front:

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global economy continues to be confronted with some uncertainties. While there have been improvements in the advanced economies, risks to sustained recovery remain…

…In the domestic economy, the latest indicators point to robust investment activity and continued expansion in private consumption. Going forward, this trend is expected to continue…Investment is being led by capital spending in the domestic-oriented sectors, the oil and gas industry and the ongoing implementation of infrastructure projects. The external sector is also expected to improve and provide additional support to the economy.

…While inflation is expected to rise during the year, the expectation is for it to remain modest. Higher global prices of selected food commodities and domestic factors are expected to increase costs and contribute to higher prices…

At this stage, I don't think we're going to see much in the way of policy action at all this year...barring any "unknown unknowns" making an appearance. I'm still of the view that a bias towards tightening should be warranted towards the end of the year, but BNM has historically been more accommodating toward growth rather than inflation.

One very good reason for policy inaction or even for a loosening of policy, is that if you subscribe to a NGDP growth target you’d be pretty disappointed with monetary policy decisions over the past year (log annual changes):


You can see the effect of weaker global commodity prices on narrowing the growth rates between nominal and real GDP quite clearly from here. If BNM is right about stronger market prices going forward, then we should see a rise in NGDP growth nearer to Malaysia’s long term norm of about 10%, and no policy action would be needed to boost growth.

Anecdotal evidence appears to support the slower NGDP growth story – the past quarter’s earnings “season” has been described as “disappointing” i.e. profit growth has been below expectations.

There’s also the dichotomy between the reported numbers and what people are saying on the ground – again, nominal income growth for companies and workers doesn’t seem to jive with increases in real output.

Weaker growth in nominal prices are having an impact.

This also explains the relatively poor performance of the MYR recently, as low commodity prices generally allows for a weaker exchange rate for commodity producers.

The bottom line is that there does exist a case for looser monetary policy, even if it goes against my more “conventional” instincts based on the dataset that more usually informs monetary policy decisions.

I think the economy is close to full capacity – the labour market certainly indicates it – and a loosening of monetary policy would just trigger higher consumer inflation with all that entails. On the other hand, nominal income growth (and wage inflation) are a necessary condition for reaching high income status, so a little higher rate of inflation might actually be economically useful, especially if there is continued weakness in global commodity prices.

I feel conflicted, and I think this is a conflict that will continue to plague me for some time to come.


  1. Dammit subsidies, stop making life so hard for domestic economists and econometrics-enthusiasts!

    But really, NGDP targeting (I actually do like the idea a lot...for the US!) seems a bit pointless for BNM when so much of the CPI is captured by subsidies.

    Speaking of which, has BNM invited you guys over for their Annual Report release yet?


    Regarding your conflict about high income status targeting...

    I keep telling people who are so concerned about Malaysia not achieving high income status by 2020, policymakers could (academically speaking of course) get rid of all subsidies and let the ringgit float (if we are still a fossil fuel exporting nation then) at the same time in mid 2019.

    We will automatically float - flexible labour markets, willing - to high-income USD15,000 per capita in a couple of months. The only downside is that it's really, really, really, really unsustainable (but makes for a really pretty good newspaper headline and easy political ammunition).

    1. Jason,

      Would the CPI even come into it? Lower prices on domestic goods would be offset by higher government expenditure on subsidies - NGDP is an aggregate number remember.

      For the briefing, yes, we've already indicated our attendance.

      On the last, my conflict isn't about high income targeting, it's about the current stance of monetary policy - the tight labour market, slowing credit growth, and the deterioration in the current account indicate the bias should be towards tightening, but the path of NGDP says the exact opposite. Tough call saying which is more correct.

      Also I'm not sure what you're implying about the float - are you saying the Ringgit isn't floating right now? There's been almost zero movement in international reserves that would be associated with intervention. Yes, I know they can do it off-balance sheet, but there's been a huge increase in market volume since 2005, which means the scale of intervention needs to be progressively larger as well.