I was looking at liquidity conditions, and found something interesting, but I’ll get to that in a bit. M1 growth decelerated sharply in October, although M2 showed a slight uptick in growth (log annual and monthly changes; seasonally adjusted):
Part of that is slowing loan growth, which limits deposit growth and thus impacts the money supply (log annual and monthly changes):
In fact, looking at the monthly growth numbers, credit creation growth is coming off to a much lower level. This isn’t just about tighter credit conditions, but more a factor of declining credit demand:
This is despite historically low lending rates and what appears to be only marginally tighter credit standards. What this might say about economic activity this quarter, or for next year, I’m not going to venture to hazard a guess. Suffice to say, it’s one more indicator that things are softening a bit.
Here’s another one – the MGS yield curve is flattening:
The spread between the short and long end is now at the lowest level since the end of 2008:
Again, I’m unsure if too much could be read into this, as it could also be a sign of declining inflationary expectations (which itself would be a signpost for slowing growth).
Now moving on the interesting thing I was looking at the other day (RM billions):
What this shows is that BNM has been leeching liquidity out of the banking system lately – the latest jump began in September-October 2012, with net BNM Bills outstanding climbing a cool RM17 billion. Since February 2010 (the last trough), net bills issuance has taken off RM135 billion from the interbank system.
But what I wanted to really find out is how much excess liquidity there really was in the system, and how much the central bank is putting away. From memory, there’s no real agreement on what constitutes excess liquidity (I haven’t done any kind of literature search). So I’m taking a stab at my own, scaling it against broad money supply measures:
I’ve added here required and excess reserves to the numerator, while adding the bills figure to the denominator. The results above aren’t well behaved – there’s no obvious trigger point for central bank intervention in the interbank market (in practice, it’s probably more a factor of movement in the overnight right towards the policy rate intervention bands).
But…it does seem as though a “normal” level of excess liquidity appears to be around 20%-25% of M2 or M3, and that the recent action in bills has had only a minor impact on banking system liquidity or the monetary policy stance. One interesting implication here is that managing liquidity in Malaysia going forward is going to be an increasingly expensive proposition – 6 month bills had an indicative yield of 3.00% in October. The obvious corollary is that any tightening move next year will include a coordinated jump in the required reserve ratio, for which BNM needs to pay zip.
All data from the October 2012 Monthly Statistical Bulletin published by Bank Negara Malaysia