Malaysia cuts banks' statutory reserve requirement ratio
Kuala Lumpur
MALAYSIA's central bank has cut the statutory reserve requirement (SRR) ratio of banks to 3.5 per cent from 4 per cent with effect from Feb 1 to address a liquidity crunch in the financial system following capital flight from funds returning to higher-yielding assets in the United States and Malaysians seeking steadier currencies than the depreciating ringgit.
Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 3.25 per cent and analysts do not foresee a cut to the key lending rate unless the SRR reduction proves inadequate to stimulate credit growth.
In a statement after a meeting of its monetary policy committee on Thursday, Bank Negara said the decision to reduce the SRR was undertaken as part of a comprehensive effort to ensure sufficient liquidity in the domestic financial system, and to support its orderly functioning.
Since early last year, it has relied on its monetary operations including the reverse repo facility to provide liquidity as net external outflows reduced the amount of liquidity in the system. As at Jan 21, this amounted to RM40 billion (S$13.1 billion).
The OPR remains the sole indicator used to signal its monetary policy stance, BNM said, adding the SRR is an instrument to manage liquidity.
Analysts have pointed out high levels of public and private indebtedness - especially household debt of nearly 90 per cent of GDP - make it tough for the central bank to cut the OPR. Moreover, the feeble ringgit would be further damaged by lower interest rates.
"Finally, at least it is something positive," said independent interest rate and forex strategist Suresh Ramanathan, of the SRR reduction.
Mr Ramanathan had urged the authorities to implement anti-cyclical measures including a rate cut to address the liquidity crunch which prompted a number of banks to increase their base rate this year.
The floundering economy is another worry. Business and consumer sentiment is at a seven-year low and the diminishing ringgit - not seen appreciating below 4 to the US dollar in the next few years - will continue to crimp spending and investments.
For instance, after many years of expansion, vehicle sales are forecast to contract 2.5 per cent next year. Banks are also increasingly chary of vehicle loans as defaults rise.
Mr Ramanathan said it will take 2-3 months to see how much liquidity and credit growth the SRR reduction provides, and if there is sufficient growth, the OPR will be kept untouched.
"If there is an increase in private consumption - especially big-ticket items, where the value added to GDP is quite strong - Bank Negara can ease off a bit on the cuts," he said.
