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Bank Negara Malaysia (BNM) hiked the OPR by 25bps to 3% on 5 May as what some analysts said " Surprising ". The OPR hike was a pre-emptive strike on inflation pressures as the output gap closes. Many analysts are expecting hikes to resume only in July as inflation remains largely supply side driven. However, BNM seems to act before demand pull pressures dominate and before the output gap turns positive. In our view, the OPR and SRR hike is indicating two things here. Hints #1 Inflation is going to threaten the Malaysian economy in the near-term (at least). Recent increase in prices of petrol and sugar will further accelerate the numbers. With ongoing efforts by Government to reduce the subsidies, inflation numbers for sure will gone up. Citi Research: Regional Policy Rates as at 10th May 2011 Hints #2 Related to inflation also, BNM is trying to reduce the increasing food and resources prices. If we can reduce the import price, by having a stronger currency, this would be a wi...

As expected, Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 2.75% yesterday. This was the 3rd time in a row that BNM left it unchanged. Are there any hints by BNM on Malaysia's economy this year? We can explore the "hidden messages" from the monetary policy statement as below: Regional Front: While advanced economies continue to register modest growth, most emerging economies have experienced strong growth. For Asian region, domestic economic activity continues to support the growth momentum amid weaker external demand. Shifts in global liquidity have resulted in significant capital flows into the emerging economies , in particular, Asian region, and have brought with it risks to macroeconomic and financial stability. The region is also being affected by global inflationary pressure arising from the higher commodity and food prices. On Malaysia: Recent indicators point towards a sustained expansion in private sector activity. External...

Yesterday, China surprisingly raised its interest rate by 0.25%  as follows: - 1 year lending rate from 5.31% to 5.56% - 1 year deposit rate from 2.25% to 2.50% Why China raise interest rate? 1. To cool down the over-heating property sector. 2. Combat inflation 3. Low liquidity in the banking system While inflation was hovering around 3.5% currently, even though the deposit rate has been raised, the net real interest rate is still in negative territory (3.5% - 2.5% = -1.0%). This is one of the main reason why Chinese were going all out to invests, especially in real-estate, due to its low yield if sitting in the bank (even lower than Malaysia). However, China would be facing another problem... Raising interest rate would attract capital inflows , which could dampen the purpose of containing inflation. Foreign investors view Chinese renmimbi as undervalue , mainly due to interventions by Chinese government. The latest news could ignite a fresh round of thoughts,...