Thread by @ooihann

Malaysia's 🇲🇾 July Inflation: 4.4%🔥. Prices getting higher & squeezing our budgets...

So why did BNM just increase OPR +25bps to 2.50%, increasing our loan installments? Surely this makes things worse?

Sudah jatuh, ditimpa tangga?

To understand, let's look deeper... 🧵

1/n

Last week, @StatsMalaysia reported inflation of +4.4% YoY for July 2022.

That's basically way way higher than most countries' unofficial target of 2.0%.

Worse, a majority of things from food to transport to clothes are inflating higher than 4.4%.

https://twitter.com/ooihann/status/1564137974761005056

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To "control" inflation, BNM (via MPC) which sets an overnight policy rate (OPR), which MY 🇲🇾banks use to set their loan rates to us the rakyat.

OPR goes up, floating loan installments (eg home loans) up, and renters will also see their landlords raising rentals to cover.

3/n

Eh? Things expensive, why increase our loan installments?

For this, we need to understand a little basic economics (sorry!). ie Demand <> Supply.

At the basics, when demand (how much we want to buy) is more than supply (how much is produced) = Price Inflation 🔺

4/n

Most experts agree that 2022 Inflation in Malaysia is caused by:

1. Covid Shutdown 2020-2021 & 2022 Reopening.
2. China Covid Zero Policy.
3. Russia / Ukraine Conflict.
4. MYR weakness.

5/n

1. 2Y Covid -> Reopening.

~2 years low demand & supply, sudden 'back to normal' demand, but supply (ie making stuff, hiring workers) takes time to come back.

Demand back? Isn't "Ekonomi terjejas"?

Actually:
- Wholesale & Retail = record RM133bn in June.
- Q2 GDP = 8.9%

6/n

2. China Covid Zero Policy

Over the last 20 years, China has become the world factory, accounting for almost 30% of global manufacturing.

But their constant mini-lockdowns of "factory" cities in 2022 (Shanghai, Xian, Yiwu, etc) have caused supply disruptions globally.

7/n

3. Russia / Ukraine Conflict.

Focusing on economic (rather than political) impact, it was huge from Feb 2022, causing supply shortages in:
- Oil
- Gas
- Chemicals (including fertilisers)
- Wheat

Between Russia 🇷🇺+ Ukraine 🇺🇦= big exporters of those 4 things.

8/n

4. MYR weakness, USDMYR = 4.50 today - needs a whole other thread...

So, quadruple whammy on Demand and Supply. Now back to Malaysia, how do we tackle inflation?

We can't solve China's Covid policy, or do much about Russia / Ukraine, so we have 2 options:

9/n

Option 1 - Tough it out and wait for supply to increase (when prices are high, businesses will make more stuff, supply increases).

But supply takes time to normalise, this means higher inflation for months and months, something against BNM's mandate (price stability).

10/n

So BNM has to go with option 2.

Option 2 - Reduce demand. Increase OPR = less money to spend = less demand = lower inflation.

Unfortunately, to control inflation, there might be some collateral damage, ie the rakyat and our wallets.

11/n

Today, 8 Sept, the BNM MPC increased the OPR +25bps from 2.25% -> 2.50%. This is the 3rd increase in a row!

bnm.gov.my/-/monetary-pol…

Remember, every +25bps increase in OPR and our home loans is RM35/month more for every RM250,000 loan principal.

https://twitter.com/ooihann/status/1544594386503081986?s=20&t=hFHST1HpF3MgqEo_TwBP_g

12/n

Where are things going next?

Well, I've predicted the last 3 increases, and with one more BNM MPC meeting in November, quite likely one more +25bps increase in 2022, so buckle up everyone!

https://twitter.com/ooihann/status/1557599999856283648

13/n

If you liked this 🧵, follow me @ooihann where I tweet 1-2x per week on how Malaysia's 🇲🇾 stats and numbers affect us all and our wallets.

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