Eye On Asian Greenspans: Rate Cutting ...

More Easing from Bank Negara Malaysia didn’t won’t accomplish much…

December consumer inflation data released by the Malaysian Department of Statistics today came in at +4.39% year-over-year, well below last summer’s high when CPI seemed poised to enter double digit rates. The central bank took this cue as justification for further rate cuts, lowering the overnight rate by 75 basis points to 2.5% and slashing the statutory reserve rate from 3.5% to 2% effective Feb 1.

But… the benchmark KLSE traded down almost -1% for the day as the investors weighed the prospects of a second government stimulus package.

The big picture for Malaysia is negative, if not awful. As a net exporter of oil and other commodities, the receding inflation figures are a double edged sword –lower prices at the pump come hand in hand with lower prices at the docks. Cooling demand for electronics from developed world economies is weighing heavily on the manufacturing sector.

A second stimulus package or further easing at this stage will likely not do much offset external demand retraction, although further declines by the Ringgit spurred by the rate cut may help shore up some sectors.

See the chart below, which largely reflects the dynamics of stock markets as stealth leading indicators. The “re-flation” rallies we saw in December were largely pricing in the expectation of aggressive rate cutting that we are now seeing here in January. By the time this aggressive rates cutting news is hitting the tape, the marginal buyer has already turned to selling on the news.

Andrew Barber

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