Bank Negara Malaysia wishes to announce the decrease in the Statutory Reserve Requirement (SRR) Ratio from 4.00% to 3.50%, effective from 1 February 2016.
The decision to reduce the SRR is undertaken as part of a comprehensive effort by Bank Negara Malaysia to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets. Since early 2015, Bank Negara Malaysia has relied on its monetary operations, including the reverse repo facility, to provide liquidity to the banking system as net external outflows reduced the amount of liquidity in the system. As at 21 January 2016, this has amounted to RM40 billion.
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.
The decision to reduce the SRR is undertaken as part of a comprehensive effort by Bank Negara Malaysia to ensure sufficient liquidity in the domestic financial system, and to support the orderly functioning of the domestic financial markets. Since early 2015, Bank Negara Malaysia has relied on its monetary operations, including the reverse repo facility, to provide liquidity to the banking system as net external outflows reduced the amount of liquidity in the system. As at 21 January 2016, this has amounted to RM40 billion.
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.
- Reducing SRR would mean banks are able to lend more as they do not have to buffer more of their cash under reserves.
- This is a sign that BNM would want to try to boost the domestic economy by allowing banks to give credit out to people/businesses that would in turn lead to spending/investments.
- Could also be a sign that BNM is worried about the slowdown of the Malaysian economy. Remember that we have tweaked our growth forecast from 6% -> 5.5% -> 5% and now 4%+.
At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.
While the global economy continues to expand, the recovery in the advanced economies has not been as strong as earlier expected and the growth in the emerging economies has slowed. The current heightened financial market volatility and uncertainties also pose additional downside risks to global growth.
For Malaysia, growth remains driven by domestic demand. While private consumption has moderated as households adjust to the higher cost of living, household spending is being supported by continued growth in income and employment. Overall investment has benefited from the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors despite the lower investment in the oil and gas sector.
Going forward, while recent trends suggest a turnaround in exports, the contribution of the external sector to overall growth is expected to be modest. In this challenging environment, the economy is expected to experience more moderate growth in 2016, after expanding by about 5 percent in 2015. Downside risks to growth have increased following greater uncertainty on both the global and domestic fronts. In confronting this more difficult environment, the Malaysian economy will benefit from having diversified sources of growth, economic flexibility, low unemployment, manageable level of external debt, and a well-capitalised banking system and developed capital markets that provide continued access to financing.
Headline inflation averaged 2.1% in 2015 and is expected to be higher in 2016, given recent adjustments in administrative prices and the weaker ringgit exchange rate. The impact of these domestic cost factors on overall inflation is, however, expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. In terms of trajectory, headline inflation is anticipated to peak in the first quarter of 2016 and to moderate thereafter.
Recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets. The net external outflows have also led to a moderation in domestic liquidity. Bank Negara Malaysia’s monetary operations have ensured that there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets. The financial system remains sound with financial institutions operating with ample liquidity buffers. Consequently, the growth of financing to the private sector continues to be healthy.
At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. The MPC recognises that there are heightened risks in the global economic and financial environment. These risks are being closely monitored to assess their implications on macroeconomic stability and the prospects of the Malaysian economy. This is to ensure that the monetary policy stance is consistent with the sustainability of the overall growth prospects.
While the global economy continues to expand, the recovery in the advanced economies has not been as strong as earlier expected and the growth in the emerging economies has slowed. The current heightened financial market volatility and uncertainties also pose additional downside risks to global growth.
For Malaysia, growth remains driven by domestic demand. While private consumption has moderated as households adjust to the higher cost of living, household spending is being supported by continued growth in income and employment. Overall investment has benefited from the implementation of infrastructure development projects and capital spending in the manufacturing and services sectors despite the lower investment in the oil and gas sector.
Going forward, while recent trends suggest a turnaround in exports, the contribution of the external sector to overall growth is expected to be modest. In this challenging environment, the economy is expected to experience more moderate growth in 2016, after expanding by about 5 percent in 2015. Downside risks to growth have increased following greater uncertainty on both the global and domestic fronts. In confronting this more difficult environment, the Malaysian economy will benefit from having diversified sources of growth, economic flexibility, low unemployment, manageable level of external debt, and a well-capitalised banking system and developed capital markets that provide continued access to financing.
Headline inflation averaged 2.1% in 2015 and is expected to be higher in 2016, given recent adjustments in administrative prices and the weaker ringgit exchange rate. The impact of these domestic cost factors on overall inflation is, however, expected to be mitigated by the continued low energy and commodity prices and the generally subdued global inflation. In terms of trajectory, headline inflation is anticipated to peak in the first quarter of 2016 and to moderate thereafter.
Recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets. The net external outflows have also led to a moderation in domestic liquidity. Bank Negara Malaysia’s monetary operations have ensured that there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets. The financial system remains sound with financial institutions operating with ample liquidity buffers. Consequently, the growth of financing to the private sector continues to be healthy.
At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity. The MPC recognises that there are heightened risks in the global economic and financial environment. These risks are being closely monitored to assess their implications on macroeconomic stability and the prospects of the Malaysian economy. This is to ensure that the monetary policy stance is consistent with the sustainability of the overall growth prospects.
- BNM is in a tough position. Upping the OPR would mean the currency will strengthen because deposit rates would go up. However it would also lead to higher borrowing cost and possibly an increase in NPL (non-performing loans).
- If the OPR were to reduce it would lead to more capital outflows as the currency will weaken; deposit rates would go down. However borrowing cost will be cheaper but bear in mind that household debt ratios are already sky high now @ 88% to GDP.
- Hence this is catch 22: neither left nor right, just stay where you are @ 3.25%.
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