Thursday, January 25, 2018

BNM Watch: On The Move

The OPR was hiked 25bps today to 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively.

The global economy has strengthened further, with growth becoming more entrenched and synchronised across regions…Global growth is projected to experience a faster expansion in 2018. In this environment, risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion.

For the Malaysian economy, latest indicators reaffirm the strength in exports and domestic activity. Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy….

…However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate….

…With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation. At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time. At the current level of the OPR, the stance of monetary policy remains accommodative….

After the strong signal given at the last MPC meeting in November, BNM fulfilled market expectations with this move. Up to last week, I think the bond markets were still in two minds whether this would happen, having only half priced it in. Regardless, foreign investors were in no doubt, judging by the moves the Ringgit has made over the past couple of months.

Personally, I think this is the right move – the data certainly supports a tightening of monetary conditions, even if the appreciation of the Ringgit makes it appear unnecessary. The problem with playing the expectations game is that if you don’t follow through, the markets might reverse course and make it necessary again. For practical purposes, monetary conditions started tightening right after the release of the last statement, and not raising the OPR today would have undone that. Borrowers will have to start paying more on their loans from next month, but that would be the only difference. Granted, that’s maybe RM2 billion or more off the table in private consumption and investment, but that’s in the context of a faster growing economy.

Speculation will now shift to if and when there will be another hike. Nothing in the statement suggests one is on the cards for the moment, but the “pre-emptive” line at the end indicates BNM will be keeping an eye out for an acceleration of loan demand. I think the data would support a further move in the second half of the year, though that might be skewed by spending around the general election, which I think will probably come in March. Provisionally, I’m not expecting any consideration of further tightening until September at the earliest.


  1. Some people are saying govt increased the interest rate to protect the ringgit which is only recovering after going to the dogs these past few years. They say the govt is unnecessarily making the rakyat suffer by paying higher more in their loans.

    I saw another comment which makes more sense but i am not sure whether he is a BN cybertrooper.

    He said "BNM noted that the global and local economy is on the growth trend. Therefore they increase the rate aiming so that the economy does not overheat i.e expand beyond its means.

    So, for exp, Aeon Credit Service (M) Bhd posted a 17.5% higher net profit year-on-year (yoy) for the 4th quarter of 2017.

    This may inspire AEON to provide more credit to customers and invest in new shopping malls. Low interest rate will encourage this activity. But it will make people have more debt as they upragde TVs, phone etc. And Aeon will have many malls which may turn empty during economic downturn. So the interest rate increase will make Aeon think twice and be more modest in any expansionary move. Consumers too will be more careful entering into debt. Expansion will still happen but at a slower rate"

    Which opinion is true?

    1. @anon 6.02

      My data shows wages began growing robustly since July last year. BNM tells me many manufacturing firms are up against capacity constraints, and will be investing more this year. Overall loan demand has accelerated in the last few months, and in the case of households, for nearly a year.

      There's more than enough data to back an interest rate hike.

  2. what is your comment on this?
    is it possible?