• BNM cuts SRR from 3.0% to 2.0%

• The measures will release approximately RM30bn worth of liquidity into the banking system

• Indonesia: Bank Indonesia trims policy rate to 4.5%

• Philippines: BSP slashes policy rates by 50bps to help fend off Covid-19

• Australia: RBA announced emergency rate cut, initiated QE

• Taiwan’s central bank cuts rates too

• What central banks still have left

Bank Negara Malaysia has announced a 100bps cut in the statutory reserve requirement (SRR) ratio from 3% to 2%, effective March 20. This is the second SRR cut in four months, with the last being the 50bps cut announced on 16 November last year to 3.0%. In a statement, BNM also said that each principal dealer will be able to recognise Malaysian government securities and Malaysian government investment issues (MGS and MGII) of up to RM1.0bn as part of the SRR compliance. These combined measures will release approximately RM30.0bn worth of liquidity into the banking system. The November cut was estimated to have released RM7.4bn liquidity into the banking system.

The SRR cut was aimed at providing additional liquidity to the financial system and also to complement the two recent OPR cuts in early 2020. 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 additional liquidity would help to stimulate the lending activities at a time when loan growth has been moderating to 3.5% as of January 2020 while the industry loan growth for the whole of 2019 was 3.9%, down from 7.7% in 2018.

Meanwhile, there is the prospect that BNM may cut the Overnight Policy Rate (OPR) by another 25bps to 2.25% in its next schedule meeting on 5 May. However, in the wake of the statutory reserve move, a rate cut before the bank’s next scheduled meeting cannot be ruled out. BNM has reduced the OPR by 50bps this year to 2.5% leading to a cumulative rate reduction of 75bps since 2018. There are also stronger signals for another rate cut based on the decline in KLIBOR and increase in spread between the KLIBOR and interest swap rate.

The tone of the 3 March monetary policy statement was more dovish and leaves the door open for further rate cuts if necessary. There was a sense of uncertainty on the growth outlook subject to the duration and severity of Covid-19. Hence, we are not ruling out a further rate cut particularly if there are signs of further weakness to global growth and major central banks stand ready to respond to the COVID-19 outbreak.

Bank Negara Malaysia’s move comes on a day of action for Asia Pacific central banks as coronavirus threatens to bring the global economy to a standstill. The Reserve Bank of Australia lowered its benchmark rate by 25bps at an emergency meeting, while central banks in Indonesia, Taiwan and the Philippines cut their benchmark rates by 25 and 50 basis points, respectively.

Source: BIMB Securities Research - 20 Mar 2020