Malaysia Surprises with First Cut in Banks' Reserve Ratio in 3 Years (Reuters)
Last Modified: 04:20 AM, Fri Nov 08, 2019

By Joseph Sipalan

08 November 2019

Word Count: 475

Malaysian banks' statutory reserve requirement (SRR) will be reduced to 3.00% from 3.50%, effective Nov. 16, Bank Negara Malaysia (BNM) said today, the first cut in three years that came days after it left its key policy interest rate unchanged. Economists said the move suggested that the economy was slowing down in the second half. It also sets the stage for an interest rate cut in the central bank's next policy review in late January, they added. "The decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system," the central bank said. "This will continue to support the efficient functioning of the domestic financial markets and facilitate effective liquidity management by the banking institutions." Economists said the cut in SRR should bring down the interbank lending rate and boost loan growth.

* Reserve requirement cut to 3% from 3.5%

* First cut in statutory reserve requirement since Jan 2016

* Economists say move unexpected, suggests slowness in economy

* Cut to be follow by reduction in key interest rate - economists (Adds economists' quotes)

By Joseph Sipalan

KUALA LUMPUR, Nov 8 (Reuters) - Malaysian banks' statutory reserve requirement (SRR) will be reduced to 3.00% from 3.50%, effective Nov. 16, Bank Negara Malaysia (BNM) said on Friday, the first cut in three years that came days after it left its key policy interest rate unchanged.

Economists said the move suggested that Southeast Asia's third-biggest economy was slowing down in the second half. It also sets the stage for an interest rate cut in the central bank's next policy review in late January, they added.

"The decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system," the central bank said in a statement.

"This will continue to support the efficient functioning of the domestic financial markets and facilitate effective liquidity management by the banking institutions."

The BNM on Tuesday maintained its key overnight policy rate at 3.00% - as expected - betting that private sector spending would offset pressure in the economy from weaker exports.

Malaysia's exports in September recorded their biggest decline in nearly three years.

Economists said the cut in SRR - the minimum amount of reserves that must be held by a commercial bank - should bring down the interbank lending rate and boost loan growth.

They said it was too early to say how much money the move would free up, but the last time the BNM cut the SRR in January 2016, economists estimated it added 6 billion ringgit ($1.45 billion) to the system.

"It's a major move, it was totally unexpected given what they signaled just this week in the policy statement which was pretty much quite balanced in its tone of risk," ING Asia economist Prakash Sakpal said.

"We should see GDP slowdown continuing towards the end of the year. It won't be outside BNM's forecast of 4.3%-4.8% for this year, but clearly the downtrend will eventually force BNM to cut its overnight policy rate."

Alex Holmes, an Asia economist with Capital Economics, said the Philippines saw growth in credit and broad money supply after a similar move last month.

"BNM tends to be forward looking, they were the first to cut the key rate in the region back in May," Holmes said.

"It was kind of a surprise that they didn't cut this week, but they also tend to move in small increments and leave a long time between cuts. We think they will cut in either January or March." ($1 = 4.13 ringgit) (Reporting by Krishna N. Das and Liz Lee; Writing by Krishna N. Das; Editing by Simon Cameron-Moore and Angus MacSwan)

Powered by InfoDesk
RIS
InfoDesk Inc
Article Info
Creditline: Reuters
Slugline: MALAYSIA-ECONOMY/ (UPDATE 2)