Quantitative Easing – Our Way of Life?

This may sound too far fetched, but if you have been reading and monitoring global news, it is not something alien enough to investing community. I was told once by my mentor that ability to foresee the future is one of the key distinguishing factors in making an excellent and a mediocre fund manager.

I put it to you that Malaysia is not too far from quantitative easing – a simple term of debt monetization that a technique that is well accepted in the West, though its long term consequential effects remain debatable.

The US is already in advanced stage of debt monetization after its Fed fund rate is already hitting the floor. Further cut in official interest rate will only worsen market confidence, and instead of narrowing the credit spread, it could potentially lead to widening of credit spread in the long end of the curve. At the February meeting, the Monetary Policy Committee of United Kingdom, voted unanimously to seek the Chancellor’s permission to engage in quantitative easing. The Bank of England is already purchasing certain private sector assets (commercial paper) through the 50bn pound T-bill funded Asset Purchase Facility (APF) and plans to acquire selected corporate and bank bonds in the near future.

What is the chance that we are the next candidate for quantitative easing? I would say more than 50% chance for couple of reasons.

Reason 1 – BNM is close to exhausting its traditional option. It has lowered the OPR 150bps since November 2008 to 2%. Another 50bps possibility cannot be denied, even the Governor Zeti claimed that Bank Negara has mostly front-loaded the rate, and too low the rate is not the right strategy for the country.

Reason 2 – Inflation outlook – since the drop of oil prices, central projections are showing inflation may markedly below target over the medium term.

Reason 3 – Money velocity has been easing quite drastically and it raises the risk of liquidity trap, if this risk is not addressed promptly.

Reason 4 – Fiscal impulse can be far lesser than initial projection, if financial disintermediation is not as strong as we thought, if market confidence deteriorated further.

Reason 5 – Erosion of market confidence as today’s economic troubles do not occur in isolation. Optimistic says our nation has faced similar challenges before and overcome then. My take – this downturn is transformational that will dramatically change the way our as well as global economy has operated since.

Next question to ask – is how this quantitative easing take place in Malaysia and what would be implication for everyone of us?