Analysts sensed the urgency on BNM’s part to respond quickly in easing monetary policy aggressively, by cutting SRR is to improve loanable funds for banks from reserves to create credit. — Bernama photo
KUCHING: Bank Negara Malaysia (BNM) lowering its Statutory Reserve Requirement (SRR) ratio was an expected move by economists, allowing for some RM30 billion worth of liquidity to be injected into the banking system.
BNM lowered the SRR ratio on Thursday by 100 basis points (bps) from three per cent to two per cent, effective March 20, 2020. BNM also guided that each principal dealer is able to recognise MGS and MGII of up to RM1 billion, as part of the SRR compliance until March 31, 2021.
Previously, in November 2019, BNM lowered the SRR by 50bps from 3.5 per cent to three, which was its first cut since February 2016. With the 100bps cut, the SRR will be at its lowest rate since April 2011.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) observed that during the Global Financial Crisis (GFC) in 2008/2009, the SRR was lowered by 50bps to 3.5 per cent in December 2008 but was later cut aggressively to only one per cent in March 2009.
“In view of the recent negative impact from Covid-19 outbreak on the domestic economy, we believe BNM may lower its SRR further from the current two per cent, to inject more liquidity into the banking system,” it said yesterday.
The SRR is an instrument to manage liquidity, whereby banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities, this proportion being the SRR rate.
The SRR may be raised to manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial stability. Conversely, the bank may lower the SRR if necessary to support the transmission of monetary policy rates to retail rates.
“Together, with recent moves by BNM to cut its overnight policy rates (OPR), we sense the urgency on BNM’s part to respond quickly in easing monetary policy aggressively, by cutting SRR is to improve loanable funds for banks from reserves to create credit,” AffinHwang Capital added.
“This will also encourage banks to provide financing for businesses (especially SMEs), as well as to support the domestic economy from falling into possible sharp economic downturn this year. We believe the potential negative impacts of the Covid-19 outbreak and the low global oil prices on the domestic economy may likely to continue into 2Q20.”
AffinHwang Capital believed the cut in SRR was also in a bid to support and increase lending to both households and businesses.
Separately, the research team behind Kenanga Investment Bank Bhd (Kenanga Research) said the cut was expected, though it was more aggressive – exceeding its initial expectation of a 25 to 50bps cut.
“We view the SRR ratio cut as timely, providing a much need liquidity into the banking system and additional buffer for banks to possibly allow deferment or further relaxation to loan obligations of parties affected by the pandemic.
“The move helps to weather the ongoing episode of elevated capital outflows due to Covid-19 fears and domestic political instability, whereby the capital market recorded the largest net outflow of foreign funds in 10 months (-RM10.1 billion) in February, after a sustained inflow in the preceding three consecutive months.”
With the country’s growth outlook remaining grim and uncertain, attributable to the Covid-19 pandemic, oil price collapse and a change in government, Kenanga Research maintained its view that the BNM could embark on 25 to 50bps OPR cut anytime prior to or at the next Monetary Policy Meeting meeting in May.
“Plus, it still has scope to further cut the SRR to avert a liquidity shock,” they said.
“Combined with synchronous monetary easing move by major and regional central banks, BNM has ample room to lean further towards an expansionary monetary policy. As such, we foresee another 50bps rate cut in the near term, bringing the OPR to 2.00 per cent, its lowest since the GFC in 2008-09. Similarly, we also believe that BNM still has scope to cut the SRR by up to 100bps to as low as 1.00 per cent as it did in March 2009 to provide ample liquidity in the financial system during the GFC and avert a liquidity crunch.”
AffinHwang Capital shared this view, believing that BNM may lower the OPR by another 25bps to 2.25 per cent, possibly in May. BNM has already cut the OPR by a total of 50bps in its first two meetings of the year in January and March.
“Apart from monetary policy measures, we believe there is also an urgent need for further government action on providing further fiscal stimulus measures to support the domestic economy from Covid-19 outbreak as well as possible global supply chain disruption on the country’s exports and manufacturing production.”