Bank Negara not expected to raise SRR ratio

AmBank Group chief economist and member of the Economic Action Council Secretariat Anthony Dass told StarBiz in the near term there is no indication to raise the SRR ratio.

PETALING JAYA: Bank Negara (pic) is not expected to follow its counterpart Bank Indonesia (BI) in raising the statutory reserve requirement (SRR) ratio, an instrument to manage liquidity in the banking system.

Economists said although the key benchmark rate, the overnight policy rate (OPR), could see rate hikes in the second half of the year, it does not at the moment justify a hike in the SRR ratio.

BI, last Thursday, in a surprise move announced a 300 basis point (bps) of staggered hikes in the reserve requirement ratio (RRR) for banks over the next eight months. RRR is similar to SRR.

At its first policy meeting of the year, BI kept its benchmark seven-day reverse repurchase rate steady at 3.50%, as expected in a Reuters poll. It also left two other main policy rates unchanged, the wire agency said.

AmBank Group chief economist and member of the Economic Action Council Secretariat Anthony Dass told StarBiz in the near term there is no indication to raise the SRR ratio.

AmBank's  Anthony DassAmBank's Anthony Dass

“At this point in time, there are no large shifts in global liquidity. However with quantitative tightening and potential interest rate hikes, especially in the United States, reversal capital flow from emerging markets (EM) is envisaged following an estimated US$1.5 trillion (RM6.3 trillion) inflow searching for yields despite their challenging economic conditions.

“The consequences of liquidity tightening are high in the EM region. On that note, the possibilities to raise SRR in the near term is low,” he said.

However, Dass said should the economic momentum improve, with rising inflationary pressure, there is a need to carefully manage the build-up of liquidity in the domestic financial system.

If not managed carefully, he said it could create risks to the domestic macroeconomic and financial stability. Unlike Indonesia, Malaysia’s liquidity on average grew around 5.6% since March 2020, hence there is no necessity to hike up the ratio for now, he added.

He said any decision to raise the ratio is seen as a pre-emptive measure to manage the risk of this build-up of liquidity from resulting in macroeconomic and financial imbalances.

The ratio is an instrument to manage liquidity and is not a signal on the stance of monetary policy.

The SRR ratio is non-interest bearing balances that commercial banks are required to keep with the central bank. A lower SRR would mean a lower amount to be set aside and this would reduce the banks’ cost of funds as the excess funds could be used for lending purposes.

The SRR ratio was last cut in March 2020 by 100 bps to 2%. The lowest it went down was 1% on March 1, 2009 during the global financial crisis.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid concurred that the ratio for now would be kept unchanged.

Bank Islam's Mohd AfzanizamBank Islam's Mohd Afzanizam

Judging from that past trend, he said the SRR does not necessarily moves in tandem with OPR.

It does not represent the monetary stance and it is merely an instrument for liquidity management, he said.

“At the current juncture, the SRR is not at its lowest level. This could imply there is room for SRR to be retained although the OPR could be raised this year. We have seen such a trend when the OPR was increased from 2% in March 2010 to 3% in May 2011, the SRR stayed unchanged at 1% for most of the time and only saw a rapid rise from 1% in March 2011 to 4% in July 2011. At that point in time, the gross domestic product was recovering at a rapid pace from -1.5% in 2009 to 7.5% in 2010 and 5.3% in 2011.

“Coming back to the present time, I’m of the view that the recovery process is expected to be bumpy and highly uncertain.

“This really reflects the nature of the economic shock which was in stark difference from the previous recession (global financial crisis (2007-2008) and Asian financial crisis (1997-98)). In that sense, the SRR could only be raised when the economic recovery is really on a firmer footing at a sustainable basis,” Afzanizam noted.

RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said she does not expect the central bank to take a similar action as undertaken by BI in the near term given the country’s existing macroprudential controls and robust external position.

She said the potential downside risks from the Covid-19 Omicron variant and weaker-than-expected global growth to the still nascent economic recovery remain.

“Raising the SRR for Malaysian banks now, to mitigate risks arising from excess domestic liquidity, may be premature and counter-productive to the recent pick-up in loan expansion,” she said.

In March 2020, the central bank reduced the ratio by 100 bps to 2.0% prior to the automatic six-month loan moratorium measure. Banks were also given temporary flexibility to utilise Malaysian government securities and Malaysian government investment issues to meet the SRR compliance until end-December 2022.

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