● Unexpected. Bank Negara Malaysia (BNM) made a surprise 50-basis point (bp) cut to the Statutory Reserve Requirement (SRR) ratio to 3.00% last Friday (8 November) just a few days prior to leave the Overnight Policy Rate (OPR) unchanged at 3.00% on 5 November. The cut is to be effective from 16 November.

● Solely to manage liquidity. In a statement, BNM said “the decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system.” But more importantly as in the previous cut, it reiterated that it “is an instrument to manage liquidity and is not a signal on the stance of monetary policy.”

● Heightened liquidity concernin the equity market. The latest decision is obviously to address tightened liquidity conditions in the domestic market due to capital outflows especially in the equity market. Foreign investors remained as net sellers in the equity market for four straight months, albeit marginally smaller outflow in October (-RM0.5b; Sep: -RM0.6b). The overall capital market (including the debt market) saw a net outflow of RM1.0b in October amid heightened concerns on emerging economies’ growth, lower commodity prices especially crude oil, and the prolonged US-China trade war uncertainty. Year-to-date (Jan-Oct), total net capital outflow reached RM4.8b (2018: -RM33.6b).

● Boost to the banking system. The 0.5 percentage point (ppt) cut to the SRR is a welcome move by BNM which would invariably reduce funding costs for banks. We estimate that the cut in the SRR will release about RM5.0-6.0b of liquidity into the banking system. The last decision on the SRR was in Feb 2016 with a similar 50bp cut.

● Dovish-bias. Given the prevalent state of uncertainty in both the global and domestic economy, the general view is that BNM monetary policy bias would still lean towards a rate cut. The fact that the SRR cut came a few days after the Monetary Policy Committee decided on maintaining the OPR at current level could possibly mean that the decision among members are not unanimous and there could be some degree of disagreement or dissent on the decision on the OPR. Nevertheless, for the next 6- 12 months, we expect BNM would still have room for two more rate cuts or up to 50 basis points. The probability of a rate cut is relatively higher in the first half of next year.

Source: Kenanga Research - 11 Nov 2019