Thursday, January 30, 2014

BNM Watch: Like Waiting For Paint To Dry

Surprise, surprise…not (excerpt):

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….

…In recent weeks, shifts in global liquidity have resulted in increased volatility and uncertainties in the international financial markets….global economic and financial conditions remain vulnerable to shifts in sentiments and heightened volatility in the international financial markets.

For the Malaysian economy, indicators suggest that the economy registered sustained performance in the fourth quarter of 2013….Going forward, the growth momentum is expected to continue in 2014, amid better performance in the external sector….Domestic demand, however, is expected to moderate, reflecting the ongoing public sector consolidation and a slower growth in private consumption.

…Inflation has been gradually rising due to disruptions in supply following adverse weather conditions and higher domestic costs. Going forward, inflation is expected to average higher largely due to domestic cost factors. The subdued external price pressures and moderate domestic demand conditions will help contain the impact of these cost factors on underlying inflation.

Seriously, this is getting boring. But when it comes to central banks, “boring” is much to be preferred to “exciting”. When things get exciting in the monetary and financial sphere, something really, really bad usually happens afterward.

From my perspective, it's way too premature to talk about a rate hike, for a number of reasons:

  1. Malaysia’s historical average rate of inflation is around 2.8%, so the current level of inflation isn’t too far out of the norm (though it should be said that inflation has averaged lower in the past 15 years at about 2.2%);
  2. Most of the impetus for recent price increases have come from policy measures, AKA subsidy cuts and tax increases. Theoretically these should have a one-time only effect on the price level, not a change in the path of expected inflation;
  3. Based on the numbers currently available, it’s still too soon to tell if there have been “second-order” effects on prices i.e. if the theory above is proven wrong. One way to get a clue on this is to look at prices not directly affected by the policy changes e.g. education and health, but so far so good;
  4. The exchange rate is a non-issue as far BNM is concerned, even with the Ringgit so obviously oversold. This is BNM thumbing its nose at the Fed and I’ll have more to say about the forex situation next week (I hope).
  5. Monetary conditions – at least, up to November – argue for either staying pat, or actually loosening policy, although the depreciation of the Ringgit half accomplishes this anyway. We’ll have a clearer idea when the monthly monetary and banking statistics for December are released this evening.

I’m crossing my fingers that things stay boring.