BNM lowers statutory reserve requirement for banks to 3.5%

  • Business
  • Thursday, 21 Jan 2016

The overnight policy rate (OPR) has been raised by 25 basis points to 3.25% by Bank Negara, with the floor and ceiling rates for the OPR correspondingly raised to 3.00% and 3.50% respectively.

KUALA LUMPUR: Bank Negara Malaysia (BNM) is reducing the statutory reserve requirement (SRR) ratio from 4.00% to 3.50%, effective from Feb 1, to ensure sufficient liquidity in the domestic financial system.

The central bank said on Thursday the lowering of the SRR was also to support the orderly function of the domestic financial markets.

This is the first time since July 2011 that BNM had adjusted the SRR. The SRR essentially is the amount of funds that commercial banks are required to keep with the central bank, interest-free, and is an instrument to manage liquidity, while the overnight policy rate (OPR) is the rate at which banks lend to each other.

BNM pointed out that since early 2015, it had relied on its monetary operations, including the reverse repo facility, to provide liquidity to the banking system as net external outflows reduced the amount of liquidity in the system.  

As at Jan 21, 2016, this has amounted to RM40bil. 

BNM stated the SRR is an instrument to manage liquidity and it is not a signal on the stance of monetary policy as this would come under the OPR.

In a separate statement, BNM said at its Monetary Policy Committee (MPC) meeting on Thursday, it had decided to maintain the OPR at 3.25%.

“While the global economy continues to expand, the recovery in the advanced economies has not been as strong as earlier expected and the growth in the emerging economies has slowed. The current heightened financial market volatility and uncertainties also pose additional downside risks to global growth,” it said.

BNM said for Malaysia, growth remains driven by domestic demand. While private consumption has moderated as households adjust to the higher cost of living, household spending is being supported by continued growth in income and employment. 

“Going forward, while recent trends suggest a turnaround in exports, the contribution of the external sector to overall growth is expected to be modest. In this challenging environment, the economy is expected to experience more moderate growth in 2016, after expanding by about 5% in 2015,” it said.

BNM also said headline inflation averaged 2.1% in 2015 and it was expected to be higher in 2016, given recent adjustments in administrative prices and the weaker ringgit exchange rate.

On the outlook, BNM said that downside risks to growth have increased following greater uncertainty on both the global and domestic fronts. In confronting this more difficult environment, the Malaysian economy will benefit from having diversified sources of growth, economic flexibility, low unemployment, manageable level of external debt, and a well-capitalised banking system and developed capital markets that provide continued access to financing,” it said. 

“Headline inflation averaged 2.1% in 2015 and is expected to be higher in 2016, given recent adjustments in administrative prices and the weaker ringgit exchange rate. 

“The impact of these domestic cost factors on overall inflation is, however, expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. In terms of trajectory, headline inflation is anticipated to peak in the first quarter of 2016 and to moderate thereafter,” it said.

BNM pointed out that recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets.

“The net external outflows have also led to a moderation in domestic liquidity. Bank Negara Malaysia’s monetary operations have ensured that there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets. The financial system remains sound with financial institutions operating with ample liquidity buffers. Consequently, the growth of financing to the private sector continues to be healthy. 

“At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity,” it said.

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