It said on Wednesday the last time Bank Negara reduced the SRR was in the January 2016 monetary policy committee (MPC) meeting, cutting it by 50bps to 3.50%.
The reduction in SRR then was to ensure sufficient liquidity in the domestic financial system and support the orderly functioning of the domestic financial markets.
The SRR is an instrument to manage liquidity. Banking institutions are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate.
“Our estimates suggest that a 50bps reduction in the SRR should help release about RM7bil of liquidity into the system. Assuming the SRR is set at 1%, this would release an estimated RM35bil of liquidity back into the system,” AmBank Research said.
It said the risk in cutting the SRR is that the funds released could find their way flowing more into the financial markets and lesser into the real economy through lending. This happened in 2016.
The SRR cut in January failed to support lending and instead favoured the bond market with loans continuing to head south while bonds benefitted. Savings picked up.
“Such trend could to take place this time around with the overall business and consumer sentiments softening and savings on the uptrend. Such a setting, if it continues, is expected to reduce the effectiveness of the 'monetary multiplier',” it said.
Nonetheless, a reduction in the SRR could still take place.
It said the country's fiscal space was currently limited as the government is determined to ensure the fiscal consolidation effort is not jeopardised by the current slowdown.
It added fiscal policy works with a lag and is normally effective in the medium and long term. Thus, monetary policy has to lend support although it cannot shoulder the entire burden of supporting the economy.
“Easing monetary conditions appears to be based on the 'orthodox policy', especially when our growth momentum wheels lower with the counter-cyclical fiscal policy being constrained.
“A further adjustment to the OPR over and above an SRR cut could also take place.
If this happens, it implies the need to ensure the degree of monetary accommodativeness remains consistent with the policy stance to support the domestic economy on a steady growth path amid stable inflation,” AmBank Research said.
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