You are here

Malaysia cuts reserve ratio in surprise move

It is part of plans to release RM30b of liquidity into banking system

Kuala Lumpur

MALAYSIA unexpectedly eased its reserve ratio as part of moves to release RM30 billion (S$9.9 billion) of liquidity into the banking system as the economy struggles through a lockdown to contain the novel coronavirus pandemic.

Bank Negara Malaysia cut the statutory reserve requirement ratio by 100 basis points to 2 per cent, effective Friday. It will allow principal dealers to use government bonds and Islamic notes of up to RM1 billion as part of reserve requirement compliance for the next year.

The announcement comes weeks after the central bank lowered the overnight policy rate by a quarter-point to 2.50 per cent, to counter risks from the virus to an already slowing economy.

"We have said before that the central bank is the only game in town, and that cannot ring more true now," said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore.

In the wake of the statutory reserve move, a rate cut before the bank's next scheduled meeting May 5 can't be ruled out, he said.

The ringgit fell 0.8 per cent to 4.4080 per US dollar on Thursday, tracking declines in regional currencies as demand for the US dollar surged.

Bank Negara Malaysia's move comes on a day of action for Asia-Pacific central banks as the virus threatens to bring the global economy to a standstill.

The Reserve Bank of Australia lowered its benchmark rate by 25 basis points at an emergency meeting, while central banks in Indonesia and the Philippines cut their benchmark rates by 25 and 50 basis points, respectively.

Malaysia already is struggling with the virus, which led the government to impose nationwide restrictions on movement. The country reported 110 new cases on Thursday, bringing the total to 900, the highest number in South-east Asia.

The central bank has said that first-quarter growth will be affected, especially in the tourism and manufacturing industries, prompting the government to introduce a RM20 billion fiscal stimulus package to cushion the blow.

"Judging by how the market has reacted to other major central banks' action, it would be surprising to see market sentiment turning positive just because reserve ratios have been slashed," said Mingze Wu, a foreign-exchange trader at INTL FCStone in Singapore. "You need stronger fiscal stimulus."

The government expects the pandemic to cause as much as RM17.3 billion of losses to gross domestic product, which suggests growth of 3.6 per cent-4 per cent this year, Prime Minister Muhyiddin Yassin said last Friday. That compares with 4.8 per cent growth estimated in the state budget, after last year's expansion of 4.3 per cent was the weakest in a decade.

The government has widened the fiscal deficit target to 3.4 per cent of gross domestic product, from 3.2 per cent earlier, to accommodate the stimulus package. BLOOMBERG