Tag: Bank Negara

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Economics

[2385] A case of MPs subverting the independence of the Bank Negara?

The importance of central bank independence has a lot to do with inflationary concerns. By independence, it typically means independence from political pressure. That entails strict separation between the central bank and the government. The central bank is not answerable to the government in general and the government does not represent the central bank. These two different entities are of two different minds. If they ever agree with each other, then it is necessarily a coincidence, or a conclusion achieved independently of each other. In its strong form, it is not achieved through any kind of discussion between the two parties.

It is feared that without independence and with exposure to political pressure, the central bank would embark on a populist policy, just as a democratic government that is susceptible to popular sentiment would. In times of crisis and without independence, the bank could run a loose monetary policy to appease the masses, eventually causing unacceptably high inflation simply by the operation of expectations.

The relationship between inflation and the independence of the central bank is widely known and is largely accepted within the field of economics: independence is correlated is an environment of low inflation. There are ample evidence for this.[1]

This is probably not subscribed by some Members of Parliament in Malaysia. Or they are unaware of it. Or that they define it very differently from what it is unusually understood. Whatever it is, three MPs are heading in the direction of subverting the idea.

According to The Malaysian Insider, MP for Kuala Selangor, Dzulkefly Ahmad of PAS wanted the Prime Minister to justify the recent rate hike by the Bank Negara. MP for Lembah Pantai Nurul Izzah said in the same report, despite stating she “was not asking the government to intervene”, she effectively blamed the government for the rate hike.[2] In the Parliament today, MP for Rembau Khairy Jamaluddin asked the Finance Minister to explain whether the Bank Negara would change the base interest rate and the reserve requirement between now till the end of the year.[3]

Truly, the concern for the rate especially is not for the Prime Minister, the Finance Minister or any person of their choosing to explain. These questions should be directed to the Bank Negara itself.

If these elected officials do try to explain it, then it will create a perception that the government and the Bank Negara are in cahoot in managing monetary policy. A mere hint of relationship as far as monetary policy is concerned is damaging to the idea of independence. The relationship suggests that the central bank in some ways is responsive to popular demand; popular demand is a code word for loose monetary policy.

What will make it worse is the possibility of the government flip-flopping, which is not rare at all in Malaysia. For a central bank that is not independent, any u-turn is especially damaging to the the credibility of the bank. Without credibility, the bank can say goodbye to its ability to manage inflation expectations.

Because of the possible implications, the Prime Minister and his Cabinet members should be careful in answering any of such questions.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — The degree of central bank independence varies considerably across countries. Several authors including Bade and Parkin (1982), Alesina (1988, 1989), and Grilli, Masciandaro, and Tabellini (1991) found that more independent central banks are associated with lower levels of inflation. This note investigates whether one can find a correlation between central bank independence and the level and variability of real economic variables such as growth, unemployment, and real interest rates. Our conclusion is that while central bank independence promotes price stability, it has no measureable impact on real economic performance. [Alberto Alesina. Lawrence H. Summers. Central Bank Independence and Macroeconomics Performance: Some Comparative Evidence. Journal of Money, Credit, and Banking. May 1993]

[2] — PAS MP for Kuala Selangor Dr Dzulkefly Ahmad said that the prime minister, who also holds the finance portfolio in cabinet, should explain the move, which surprised economists who were expecting Bank Negara to maintain the benchmark lending rate to preserve the country’s growth momentum in the face of dimming global economic prospects.

…

PKR MP Nurul Izzah Anwar also stressed that they are not asking the government to intervene in Bank Negara’s policies but said that it was important for the finance minister to clarify what she claimed were ”very inconsistent justifications.”

Nurul said that while the government could be trying to cool down the investment climate with an eye on keeping a lid on inflation, she was unconvinced that an interest rate hike could also drive the growth of the local domestic economy at the same time. [Melissa Chi. Justify May interest rate hike, PR MPs tell Najib. Journal of Money, Credit, and Banking. June 21 2001]

[3] — Tuan Khairy Jamaluddin [ Rembau ] minta MENTERI KEWANGAN menyatakan apakah Bank Negara Malaysia berhasrat untuk menyemak atau meminda Kadar Dasar Semalaman (Overnight Policy Rate) dan Keperluan Rizab Berkanun (Statutory Reserve Requirement) bagi bank-bank tempatan sehingga akhir tahun ini. Sila jelaskan sebab-sebabnya sekiranya ya mahupun tidak. [Order Paper. Dewan Rakyat. June 21 2001]

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Economics WDYT

[2383] Do you support the merger?

Do you support the possible RHB-CIMB/Maybank merger?

  • Yes (15%, 6 Votes)
  • No (73%, 30 Votes)
  • Undecided (12%, 5 Votes)

Total Voters: 41

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Background: Rivals CIMB and Maybank are racing against each other to merge (takeover?) with RHB. It is a high-stake game. The winner will have a significantly increased regional profile.

At the same time, a current shareholder of RHB, Abu Dhabi Commercial Bank (ADCB) is selling its stake to its sister’s company Aabar Investments. Both the ADCB and Aabar Investments are owned by the government of Abu Dhabi.

Something fishy is going on with that sale, especially when such transaction is being done knowing that CIMB and Maybank are in competition to merge with RHB. Maybe the government Abu Dhabi is artificially pushing the value of RHB up. It is bad sport but they cannot really be blamed for that.

Reacting to that, the Bank Negara has told RHB that the transaction price between ADCB and Aabar should not affect the prices to be offered by CIMB and Maybank. A truly “what the hell” moment from the Bank Negara. If the transaction between ADCB and Aabar is fishy, the Bank Negara’s involvement is a complete dung.

Initially, I was neutral with the merger, despite knowing that a successful transaction between RHB and CIMB or Maybank would create a giant government-linked company.

With the Bank Negara’s latest position, I am moving towards the opposition camp. I am waiting for somebody to have the balls to flick to the bird to CIMB, Maybank, Khazanah Nasional, Permodalan Nasional Berhad, the Bank Negara and the government of Malaysia.

Oh, you should really try to form your own opinion before voting.  Sorry for about trying to affect your opinion. Naughty me (but hey, this is a libertarian blog. The default opinion is likely to be obvious).

Categories
Economics

[1958] Of will we see the reintroduction of RM1 coins?

Over at the website of Bank Negara Malaysia — the central bank of Malaysia — there is an inconspicuous survey. The survey begins as it should: it informs readers of the purpose of the survey. The purpose is quite simple: to gauge public’s opinion on some possible changes to the Malaysian coins.

A redesigned coin series!

Oh so I thought until I went through the survey. The real objective of the survey is to gauge public’s opinion of the possibility of reintroducing RM1 coins in the market.

Reading through the survey, there is one possible rationale for such reintroduction because one question asks: If the replacing of the RM1-banknotes with the proposed RM1-coin would result in substantial cost savings to the country, which of these statements best describe your preference?

Hard to disagree with reintroduction if that is the rationale but I am wary of flip-flopping policy. Frequent changes to the coins and banknotes can be confusing for mere mortals on the streets.

Not too long ago in this very decade, the RM1 coins were taken out of circulation in favor of RM1 banknotes. If coin-form enjoys cheaper production cost compared to banknote-form, why were the coins phased out of the market?

If the cost of metal vis-à-vis paper or plastic contributes to the answer, I prefer to stick with the current banknotes. Once the economy is out of the woods, prices of metal are likely to go up again. That will again push coins out of circulation in favor of banknotes, if cost is the sole consideration.

But this may be a weak argument on my side. Cost should be a consideration and if BNM can adapt to changing variables, the users should too. Surely for a libertarian like me, opportunity cost is of concern. Furthermore, adaption or re-adaption of RM1 coins is likely to be painless anyway, probably with the exception of those teller machines.

So, adaption is not my main argument against RM1 coins.

The main argument is the weight of the coins. RM1 is probably the most popular denomination for the common people. Having a bagful worth of coins maybe a good idea if the BNM plans to force those lazy bastards who get on the elevator to get to the immediate next floor to do some extra physical movement. For those of us who are less gluttonous in their diet, the extra weight will be a drag.

But that is just me. How about you?

You can help the BNM decides by visiting their website[1] (it is under the Updates section on the right) or directly to a third party website[2] where the survey is actually hosted.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Bank Negara Malaysia is at www.bnm.gov.my.

[2] — [Public Opinion Survey: Third Malaysian Circulation Coin Series Project. Bank Negara Malaysia. Assessed April 21 2009]

Categories
Economics

[1380] Of targeting for an unchanged Malaysian rate

Do we need a rate cut following the September 18 footstep of the Federal Reserve to properly manage the Malaysian economy from the monetary side of the equation?

The answer is possibly no. While the US is the largest trading partner for Malaysia, the state of the US economy is not the only factors that need to be considered in managing the local economy.

The slowdown of the US economy, partly signaled by the slowdown in demand for electronics as well as the subprime mortgage crisis affect trade between Malaysia and the US adversely. The effect however is being mitigated by large government spending and as mentioned earlier by Bank Negara, robust domestic consumption and investment. While I personally expect a slowdown in the Malaysian economy, I have a feeling that the state of our economy is healthier than the one suggested by those in the broking business. For those following the security industry, suddenly, they have become more pessimistic than me!

Anyway, with a respectable performance so far, there is limited need to cut rate in order to boost the economy. We need not appeal to the short time horizon that any financial indicator proffers.

At the same time, with the rate cut by the Federal Reserve, it might actually spur growth for the Malaysian economy. First of all, it might improve the US economy which in turn encourages trade between the two countries though Malaysian export will be more expensive compared to US goods; US export will be cheaper compared to Malaysian goods. Secondly, with the reduced interest rate differential between that in the US and Malaysia, more funds could actually flow into Malaysia. Both, sooner or later would strengthen the Malaysian ringgit against the US dollar as capital flows into Malaysia from the US.

So, against, less reason to cut the Malaysian rate the next time the Bank Negara Monetary Policy Committee sits in October next month.

On the other side, inflation seems to be well contained. Hovering around 2%, it might give a rate cut a chance but with the upcoming festive season as well as increasing crude oil price, it is not wise to bet for a rate cut.

If I were a voting member within the MPC and the environment stays practically the same, I would vote like how the MPC had voted earlier; do nothing to let the rate stays at 3.50%.

Categories
Economics

[1300] Of the rate stays at 3.50%

In the US, a lot of people pay a lot of attention to what the Federal Open Market Committee (FOMC) has to say. In Malaysia, I do not feel that atmosphere whatever the Monetary Policy Committee (MPC) convenes. Partly because of that, the Malaysian economic scene is so boring compared to the US. The local economic discourse is limited to populism and hardly receives the academic attention economic news receive in the US. So, let us try to create that atmosphere here instead of complaining what a boring country we have. Be proactive baby!

First off, the MPC seems to have a template for the announcement regarding the overnight lending policy. If I may add, just like the FOMC. The first paragraph goes straight to the point.

In May:

At its meeting today, Bank Negara Malaysia’s Monetary Policy Committee (MPC) decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50 percent. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

At its meeting today, Bank Negara Malaysia’s Monetary Policy Committee (MPC) decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50 percent. [Monetary Policy Statement. Bank Negara. July 24 2007]

So it stays. What a boring comment. They need to put in some spice into it, put in some mystery, like what Greenspan did, you know?

The second paragraph talks about Malaysian economic growth in general.

In May:

Despite the less favourable external environment which has had a moderating effect on Malaysia’s export growth, strong domestic demand has sustained the growth of the Malaysian economy. The public sector has also had an important positive impact on domestic economic activity. The Malaysian economy is therefore expected to sustain steady growth over the medium term. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

The overall growth of the Malaysian economy in the first half of the year has remained favourable with the slower growth in the external sector being balanced by stronger growth in domestic demand. During the second half of 2007, the growth momentum of the economy is expected to strengthen. Recent trade data suggest that the sustained growth in Malaysia’s major trading partner economies is starting to provide support to export growth. This will complement the robust growth in both domestic consumption and investment that is expected to be sustained for the rest of the year. [Monetary Policy Statement. Bank Negara. July 24 2007]

The July statement seems to be more bullish in future prospect of the export component of the GDP. Concerning the export component, I wonder if it is caused by diversification. Also, I could not help but notice the word “public sector” in the May statement. That “public sector” probably refers to government spending. I also wonder if that “domestic demand” is caused by government spending.

Next paragraph clearly talks of the greatest enemy of most central bankers: inflation.

In May:

Inflation during the first four months of 2007 averaged 2.4% and has continued its downward trend. Going forward, the continued high prices of commodities and agricultural products, and the rise in global food prices could have implications for domestic food prices and overall inflation. Taking into account these developments and the low inflation prevailing currently, the expectations are that the average rate of inflation for 2007 would be within the projected range of 2-2.5 percent. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

Inflation moderated in the first half of 2007 to a level of 1.4% in June and averaged 2% for the period as a whole. During the second half of 2007, inflation may edge up due to both domestic and external factors, but the average rate of inflation for 2007 is expected to be at the lower end of the projected range of 2-2.5 percent. [Monetary Policy Statement. Bank Negara. July 24 2007]

Considering the second as well as third paragraph of the July statement, it sounds like the policymakers are confused. Good, bad, going up, going down… Maybe, the word guarded celebration is in order. Or maybe, neutral bias?

I feel like they are mirroring their counterparts at the Federal Reserve, with a hint of oxymoron.

The last paragraph tries to describe the future.

In May:

Given the medium term outlook for inflation and economic growth, the current level of the policy rate remains appropriate. In view of the uncertainty in the external environment, developments in the international economy would be monitored closely. The future stance of monetary policy would be determined by Bank Negara Malaysia’s assessment of new data and information and its implications on the prospects for price stability and economic growth. [Monetary Policy Statement. Bank Negara. May 28 2007]

In July:

The future stance of monetary policy would be determined by Bank Negara Malaysia’s assessment of new data and information and their implications on the medium-term prospects for price stability and economic growth. [Monetary Policy Statement. Bank Negara. July 24 2007]

In May, the confusion is pronounced. In July, the explicit signal for uncertainty is gone. Odd. Does that mean Bank Negara feels the economy is growing at a good pace while inflation is comfortably low?