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.

Check Your Credit Report

BNM has opened up access to CCRIS (excerpt):

Bank Negara Malaysia Introduces eCCRIS

Bank Negara Malaysia wishes to announce the introduction of its new initiative – eCCRIS, a secure online platform for the public to access their own Central Credit Reference Information System (CCRIS) report, anywhere at their convenience. This service is provided for free and is available nationwide starting today.

The CCRIS report shows the financing and repayment history of a borrower with participating financial institutions over the past 12 months. It does not provide an assessment of a borrower’s credit standing. It is therefore a factual report and is not a blacklist....

CCRIS was previously only available in person. You still have to register physically at any BNM or AKPK office, but you’ll have online access thereafter. The website is here.

BNM Watch: The Countdown Has Started

Yesterday’s MPC statement is about as clear a statement of intent as you can get from a central bank (excerpt; emphasis added):

Monetary Policy Statement

...At the current level of the OPR, the stance of monetary policy remains accommodative. Given the strength of the global and domestic macroeconomic conditions, the Monetary Policy Committee may consider reviewing the current degree of monetary accommodation. This is to ensure the sustainability of the growth prospects of the Malaysian economy....

In the Shadow of the Hegemon

David Beckworth thinks the Fed is the global central bank (excerpt):

The Monetary Superpower: As Strong As Ever

[A] defining feature of the US financial system is that its central bank, the Federal Reserve, has inordinate influence over global monetary conditions. Because of this influence, it shapes the growth path of global aggregate demand more than any other central bank does. This global reach of the Federal Reserve arises for three reasons.

ICYMI: Talking FX on BFM

Me, pontificating on the Ringgit and BNM’s new measures, over the past week:

Affordable Homes: Finance Is Not The Problem

In a rather unusual move, BNM issued a statement yesterday on the current hot topic of housing (in full, emphasis added):

Responsible lending guidelines ensures borrowers' affordability

This is with reference to a media report on requests for Bank Negara Malaysia to review the lending guidelines in relation to the extension of the loan repayment period from 35 to 40 years.

Bank Negara Malaysia wishes to state that financial institutions will continue to lend to individuals who can afford to take on a housing loan, including for the purchases of their first homes. In July 2016, outstanding housing loans extended by financial institutions continue to grow at 10.1%y-y and totalled RM460.2 billion. About 75 per cent of borrowers (approximately 1.5 million borrowers) with housing loans are first time house buyers.

Access to financing is not the main problem confronting potential buyers of affordable houses. The fundamental issues that require resolution are affordability and the shortage of supply of reasonably priced houses.

BNM On Hold (Again)

As promised, the MPC didn’t make a move yesterday (excerpt; emphasis added):

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 expand at a moderate pace…Going forward, downside risks to global growth remain high following uncertainty over the growth momentum and policy shifts in major economies, and unresolved issues post the EU referendum in the United Kingdom.

For Malaysia, growth moderated slightly in the second quarter of the year, following weaker net exports and a drawdown in stocks…Going forward, private consumption will remain supported by wage and employment growth, with additional impetus coming from announced Government measures to increase disposable income. Investment activity will continue to be anchored by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. On the external front, export growth is expected to remain weak following subdued demand from Malaysia’s key trading partners. Overall, the economy is projected to expand within expectations in 2016, and to remain on a steady growth path in 2017….

…At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

Translation: That’s all…for now.

Having said that, I’m looking for another cut before the end of the year. My base case this year has always been for stronger second half, due to the minimum wage revision, civil service pay hike, EPF contribution cut, and now, from the last OPR cut. Private consumption is likely to be strong this year, especially as we get past the base effects from GST implementation last year.

However, the numbers coming out from the government suggests a much stronger pullback of government spending than I expected to happen. Revenue for the first half of the year was much weaker than I thought it would be, which makes things in the second half even dicier, what with the full impact of the crash in oil and gas prices earlier only now hitting revenues. There’s a lot of pressure on MOF to pull a rabbit out of its hat to hit the 3.1% deficit target, and while they can perform seeming miracles (e.g. the spectrum auction), there’s always a tradeoff involved.

That, and the budget speech next month, will bear watching.

In any case, weaker public consumption and investment could force the MPC into action. Not deliberately mind, just that the downdraft from lower government spending would turn up as weaker than expected economic growth, which should start showing up in the numbers when the MPC meets for the last time this year, in November.

5 Thoughts on the OPR Cut

At the risk of getting a phone call from across the road, here’s what I think of last week’s 25bp OPR cut:

1. Surprise!

One of the reasons the move came as a surprise to the markets and everyone else was that it was not telegraphed beforehand. Nobody got a hint of any change in policy, right up to the announcement. On the one hand, this breaks with recent practice around the world, where guidance is given so that markets adjust in a relatively orderly fashion. On the other hand, if you believe in the neutrality of money and rational expectations, surprise changes in monetary policy are the only changes that work. More on this in a bit (see point 5).

BNM Watch: Surprise, Surprise!

In a move that caught nearly everyone looking the other way, the MPC cu the OPR by 25bp yesterday (as if you could have missed this bit of news) (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 3.00 percent. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25 percent and 2.75 percent respectively….

…Looking ahead, there are increasing signs of moderating growth momentum in the major economies. Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom….

…For Malaysia, domestic demand continues to be the main driver of growth. Private consumption will be supported by growth in income and employment, and measures implemented by the Government. While investment in the oil and gas sector is moderating, overall investment is expected to be supported by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. Exports are projected to remain weak following more subdued demand from Malaysia’s key trading partners. Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects….

Ramadhan Ruminations

Throwing this out there because this is a narrative that really ought to change:

In the runup to BNM’s latest MPC, there was a lot of market speculation that BNM should cut the OPR, because the numbers appear to justify it (lower credit growth, poor business and consumer sentiment, slowing GDP growth etc). In fact, even as the MPC stayed on hold, there continues to be opinions out there that a rate cut is and should be in the offing, with some thinking that the weakness in the MYR vis-a-vis the USD is what’s holding the central bank back from easing monetary policy.

Under different circumstances, I’d fully agree that monetary policy should be loosened. But I think in the present case, the narrative should be turned on its head, as I think the causality runs the other way.

BNM Watch: No Change, And Don’t Expect Any

Yesterday’s MPC decision came as no surprise, with the OPR held steady at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

The global economic expansion remains moderate, with divergent growth momentum across economies in the first quarter of 2015…Downside risks to this outlook, however, continue to persist. In this environment, the international financial markets will continue to be affected by shifts in global liquidity and investors sentiments.

Why Fuel Subsidies Had To Go

All explained in two slides from last week’s BNM Annual Report Briefing:

You can find the box article these were taken from here.

BNM Watch: Saying Nothing At All

As expected, the Monetary Policy Committee meeting yesterday left the Overnight Policy Rate unchanged at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….

…the downside risks to the global economic outlook remain given the weak growth momentum in a number of major economies. The uncertainties in the policy environment are also contributing to the shift in sentiments in the international financial markets.

While the Malaysian financial markets have been affected by these global developments, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets….

…Going forward, domestic demand will remain as a key driver of growth…household spending will continue to be supported by the steady increase in income and employment.…The prospects are therefore for the Malaysian economy to still remain on a steady growth path….

…For the rest of the year, headline inflation is expected to trend higher, but to be below its historical average….

…At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity….The MPC will also continue to monitor the risks of destabilising financial imbalances to ensure the sustainability of the overall growth prospects.

BNM Watch: OPR On Hold

It was a coin toss and tails it is (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….

…For Malaysia, economic activity has been supported by the continued growth in domestic demand and exports…While private investment activity is projected to remain robust, private consumption is expected to moderate…The prospects are for the Malaysian economy to remain on a steady growth path.

…Inflation is expected to remain relatively stable for the remainder of the year. Going into next year, inflation is projected to edge higher and is expected to be above its long-term average due to domestic cost factors….

The current stance of monetary policy remains supportive of growth…Further adjustment to the degree of monetary accommodation may be taken depending on how new information will affect the assessment on the balance of risks….

BNM Watch: MPC Preview

First off, I have NO idea what BNM is going to do today. I have decided opinions on what they SHOULD do, but there’s a striking divergence of opinion in the market about this.

So here’s the situation – the MPC decided in July that with growth looking robust, it’s time to normalise interest rates and head off the risk of “financial imbalances”, which could mean anything from excessive borrowing by firms and households, or an imbalance in net foreign asset holdings, or pretty much anything really. I didn’t agree with the decision then, and I still don’t.

BNM Watch: OPR Raised To 3.25%, Market Yawns

It was so blatantly telegraphed after the last MPC meeting, the disappointing thing would be if they didn’t go through with it (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise 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....

1Q2014 National Accounts

A little stronger than I thought it would turn out to be, but not too much so (log annual and quarterly saar changes; 2005 prices):

Don’t go overboard though – the quarterly growth numbers tell the real tale. 1Q2013 was a really horrible quarter, which means growth for 1Q2014 will flatter to deceive. Note that 1Q growth was stronger in 2011 and 2012, but weaker in the last couple of years (including this past quarter).

Structural Break In Monetary And Financial Data

BNM is making my life, and the lives of every economist in town, a bit more complicated (excerpt, emphasis added):

Adoption of International Financial Reporting Standards for monetary and banking data in the Monthly Statistical Bulletin (Latest Updates: 28 February 2014)

Bank Negara Malaysia is pleased to inform that starting with the December 2013 issue of the Monthly Statistical Bulletin (MSB), the set of Monetary and Banking data pertaining to the balance sheets of financial institutions (excluding tables related to loans/financing) has been revised from 2007 onwards….

...Nevertheless, users should recognise that there is a break in the historical trend between December 2012 and January 2013, especially when studying components at a more granular level.

For Monetary Aggregates (Tables 1.3, 1.3.1 and 1.3.2), data items where possible, have been aligned to meet the existing conceptual definitions. Starting January 2014, the compilation uses data collected based on the new taxonomy, which will result in a break in the historical series. In order to facilitate trend analysis, a one year back series data consistent with January 2014 has been published in the MSB.

The data revisions are all to the good, especially since it will help with cross-country comparisons.

but some of these changes will give me big headaches, especially the change in reporting from a gross to a net basis for bank balance sheets. It looks minor at a 2%-3%, but you’re fastidious about the data you use, stuff like this can drive you up the wall. There’s a half percent difference in monetary aggregates (between RM4-9b) between the old series and the new one as well. No wonder the reported growth rates looked a bit funny this month.

Oh well, there’s no stopping progress…

BNM Annual Report 2013

I think I’ve finally settled down enough to start writing for the blog again, but posts will be a little sporadic still until I feel like I’ve got all the pieces of my new job in place. That might still take some time, so I’ll be focusing less on day-to-day data releases, and more on big picture stuff for now. I’ll probably go back to more regular posting in a few months or so.

In the meantime, Bank Negara released their annual report yesterday. There’s no big surprises in terms of their view on the economic outlook – better recovery in advanced economies (leading to higher export demand), and moderating growth in emerging markets. They’re less pessimistic on growth prospects for the latter than many others are. The Governor for instance was quite emphatic that China will be able to overcome their structural and financial imbalance issues, and avoid a hard landing.

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.