The case against monetary easing

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    Asif Khan CFA

     
    The monetary policy for the second half of 2013 (Calendar year) is coming up. There are widespread rumors that this will be an expansionary monetary policy with a potential policy rate cut. Some even go to the extent of saying that reserve requirements will be reduced. As an analyst I strongly believe that an expansionary monetary policy would be the wrong move and maintaining status quo would be the more prudent policy decision.

    Before I delve into my arguments let me try to understand what can prompt central bank to go for monetary easing. The only factor that comes to my mind is the sharp decline in private sector credit growth which stood at 11.43% at the end of May 2013. Despite the decline in loan demand, lending and deposit rates remained quite sticky and have not been coming down as much as central bank would have liked. So, maybe central bank believes that further easing would cause interest rates to decline and thus spur on credit growth and investment in the economy.
    I have two major points against this theory.
    First, I believe that the slowdown in credit growth was less due to high interest rates and more due to the global economy, political violence etc. We have also seen from the past that credit growth comes down during the election year and thus 2013 was no exception. No businessmen in his right mind would go for heavy investment in such an uncertain situation. If that is the case, then going for further monetary easing would not really spur on growth at all. Credit demand would normalize once the election is over by itself without a monetary stimulus.
    Secondly, we do know that there is enough liquidity in the banking system. As per a Financial Express report, loanable excess liquidity rose to BDT 695 bn in April 2013 from BDT 456 bn in June 2012. M2 growth is around 18% as of March 2013 driven largely by unsterilized dollar buying by the central bank. This is quite high by any global standards and going for further monetary easing is quite risky from an inflationary standpoint. The situation reminds me of 2009-10 periods when central bank went for unsterilized dollar buying to prevent the BDT from appreciating. The result was a stock market bubble and double digit inflation. The real estate market also was in a bubble like situation and has been correcting ever since. We surely do not want a repeat of that situation.
    I think that the policymakers should put more attention to supply side bottlenecks such as energy and infrastructural constraints. Trying to boost GDP growth during times when ‘real’ demand is low, will only haunt the economy in the future.
    See more such posts at The Asif Khan Blog.

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    Asif Khan, CFA is the Deputy Head of Research of Research at BRAC EPL Stock Brokerage. Prior to this role he worked for around 4.5 years for a New York based Investment Management firm called Caravel Management LLC covering Asian Frontier and Emerging markets. Asif is also a CFA Charterholder and graduated Summa Cum Laude from North South University, Dhaka majoring in Finance, Accounting and Economics. He writes in newspapers and has his personal blog www.asifkhan.info

    5 comments:

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    • Avatar
      Bijon Islam

      Interesting analysis and a great take why easing is no the solution, loved the read as always

    • Avatar
      Zahedul Amin

      The monetary policy stance is more attuned towards ensuring fast growth just before next year’s election. As amply portrayed in the article, the aforementioned policy change is unlikely to cause a spike in credit growth and investment; while increasing possibility of inflationary bouts.

    • Shafin Fattah
      Shafin Fattah

      I doubt there will be an easing in monetary policy as lately Central Bank has been using it to keep a reign on inflation whilst going for expansionary budget.

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      Prudence would indicate that there would be no rate cuts. But I read too many articles indicating otherwise including
      1. Articles in newspapers citing that policy would be expansionary
      2. SCB in its forecast said they expect a 50 bps cut
      3. There was a cut in the last monetary policy and government is hell bent on showing higher growth figures (particularly because this is an election year)
      In any case, lets see what happens

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      BB declared monetary policy today. Against popular expectations they did indeed choose the more prudent step of maintaining status quo. In fact they reduced Broad Money (M2) target growth rate.

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