Bank Negara announced that the Statutory Reserve Requirement Ratio will be lowered from 3.00% to 2.00% effective from 20 March 2020. In addition, each Principal Dealer is able to recognise MGS and MGII of up to RM1.0bn as part of the SRR compliance. This flexibility to the Principal Dealers is available until 31 March 2021. These two measures will release approximately RM30bn into the system. Given the rapidly deteriorating global and domestic environment, we do not rule out another 100bps cut in SRR and reiterate our expectation for BNM to ease the OPR by 50 bps by end 1H 2020.

NEWSBREAK

Bank Negara Malaysia (BNM) announced that the Statutory Reserve Requirement (SRR) Ratio will be lowered from 3.00% to 2.00% effective from 20 March 2020. In addition, each Principal Dealer is able to recognise MGS and MGII of up to RM1 billion as part of the SRR compliance. This flexibility to the Principal Dealers is available until 31 March 2021.

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

The last time BNM attained this level of 2.00% was in April 2011. The latest move by BNM did not catch us by surprise given the large reversal of capital flows from the bond market that saw 10-year MGS yields shot up from 2.781% to 3.619% over a period of 13 days. The reversal in capital outflows may have led to reduction in liquidity in the financial system, prompting BNM to reduce the SRR to ensure there is sufficient liquidity in the domestic financial system to meet demand.

The 100bps SRR cut is expected to provide additional liquidity of RM14.4bn while the flexibility given to primary dealers to recognise MGS and MGII of up to RM1bn as part of SRR compliance is expected to provide increased liquidity of RM15-16bn. There are 19 banks’ primary dealers the country. These two measures are expected to make up BNM’s estimated RM30bn into the liquidity system.

Going forward, as capital reversals are expected to continue in the immediate term, we think BNM could still deploy additional SRR cut by another 100bps to bring it to 1.0%. On the monetary policy front, we maintain our expectation for BNM to reduce the OPR by 50bps by 1H 2020, due to Covid-19 related impact.

Source: Hong Leong Investment Bank Research - 20 Mar 2020