Bank Negara announced that the Statutory Reserve Requirement Ratio will be lowered from 3.50% to 3.00% effective from 16 November 2019. BNM said the decision is undertaken to maintain sufficient liquidity in the financial system and facilitate effective liquidity management by the banking systems. This 50bps reduction is anticipated to provide additional liquidity of approximately RM7.4bn into the system. BNM also reiterated that the SRR is an instrument to manage liquidity and not to signal a stance on monetary policy. While we do not read this as a direct precursor to an OPR cut in the upcoming meeting, we maintain our expectation for BNM to ease the OPR by 25 bps by end 1Q 2020, premised on the assumption that trade uncertainties will persist in 2020.

NEWSBREAK

Plan: Bank Negara Malaysia (BNM) announced that the Statutory Reserve Requirement (SRR) Ratio will be lowered from 3.50% to 3.00% effective from 16 November 2019.

Objective: BNM said the decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system. This will continue to support the efficient functioning of the domestic financial markets and facilitate effective liquidity management by the banking institutions.

Not a signal on the stance of monetary policy. BNM also iterated that the SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy. The Overnight Policy Rate (OPR) is the sole indicator used to signal the stance of monetary policy, and is announced through the Monetary Policy Statement released after the Monetary Policy Committee meeting.

HLIB’s VIEW

BNM has reduced the SRR by 50bps to 3.00% from 3.50%. The last time BNM attained this level was in May 2011. While the latest move by BNM has caught us by surprise, we think the objective may be to ease liquidity conditions for banks with the hope of spurring lending activity. This 50bps cut is expected to provide additional liquidity of RM7.4bn into the banking system. Latest loan approved was -8.7% YoY in September 2019 (Jan – Sep 2019: +3.4% YoY; 2018: +6.7% YoY) while total loans was modest at +3.8% YoY. (Jan – Sep 2019: +5.2% YoY; 2018: +6.7% YoY). Nevertheless, loan demand was also weak, as loan application remained in contractionary phase (September 2019: -6.1% YoY; Jan- Sept 2019: -2.1% YoY; 2018: 3.3% YoY), which may also lead to continued weak loan figures.

In the latest MPC statement on 5th November, MPC was more cautious as it sees global slowdown becoming more synchronised and downside risks arising from geopolitical tensions, policy uncertainty and prolonged trade tensions. While we do not read the SRR cut as a direct precursor to an OPR cut in the upcoming meeting, we maintain our expectation for BNM to ease the OPR by 25 bps by end 1Q 2020, premised on the assumption that trade uncertainties will persist in 2020.

Source: Hong Leong Investment Bank Research - 18 Nov 2019