Bank Negara should not increase its SRR ratio

PETALING JAYA: Bank Negara (pictured) is not expected to follow its counterpart Bank Indonesia (BI) in raising the reserve requirement ratio (SRR), an instrument for managing liquidity in the banking system.

Economists said that although the main benchmark rate, the overnight rate (OPR), may see rate hikes in the second half of the year, this does not justify a rise in the SRR ratio at this time.

BI last Thursday, in a surprise move, announced a staggered 300 basis point (bps) increase in the reserve requirement ratio (RRR) for banks over the next eight months. RRR is similar to SRR.

At its first policy meeting of the year, BI held its benchmark seven-day reverse repurchase rate steady at 3.50%, as predicted in a Reuters poll. It also left two other key policy rates unchanged, the news agency said.

Anthony Dass, AmBank Group Chief Economist and member of the Economic Action Council Secretariat, told StarBiz that in the near term, there was no indication of the SRR ratio increasing.

AmBank’s Anthony Dass

“At the moment, there are no big changes in global liquidity. However, with quantitative tightening and potential interest rate hikes, particularly in the United States, a reversal of capital flows from markets (EM) is being considered after an estimated US$1.5 trillion (RM6.3 trillion) inflow in search of yield despite their tough economic conditions.

“The consequences of tighter liquidity are significant in the emerging market region. On that note, the possibilities of increasing the SRR in the near term are low,” he said.

However, Dass said, if economic momentum improves, with rising inflationary pressure, there is a need to carefully manage the accumulation of liquidity in the domestic financial system.

If not managed carefully, he said it could create risks for national macroeconomic and financial stability. Unlike Indonesia, Malaysia’s liquidity has increased by an average of around 5.6% since March 2020, so there is no need to increase the ratio for now, he added.

He said that any decision to increase the ratio is seen as a preventive measure to manage the risk that this accumulation of liquidity leads to macroeconomic and financial imbalances.

The ratio is a liquidity management tool and not a signal on the direction of monetary policy.

The SRR ratio is the non-interest bearing balances that commercial banks are required to keep with the central bank. A lower SRR would mean a lower amount to be set aside, which would reduce banks’ cost of funds, as excess funds could be used for lending purposes.

The SRR ratio was last cut in March 2020 by 100 basis points to 2%. Its lowest level was 1% on March 1, 2009 during the global financial crisis.

Bank Islam Malaysia Bhd’s chief economist, Mohd Afzanizam Abdul Rashid, agreed that the ratio would remain unchanged for now.

Mohd Afzanizam of Bank IslamMohd Afzanizam of Bank Islam

Judging by this past trend, he said SRR does not necessarily move in tandem with OPR.

It does not represent the monetary stance and is only a liquidity management tool, he said.

“At the current stage, the SRR is not at its lowest level. This could imply that there is room for the SRR to remain, although the OPR may be increased this year. We have observed such trend when the OPR rose from 2% in March 2010 to 3% in May 2011, the SRR remained unchanged at 1% most of the time and saw only a rapid increase from 1% in March 2011 to 4 % in July 2011. At that time, gross domestic product was recovering at a rapid pace from -1.5% in 2009 to 7.5% in 2010 and 5.3% in 2011.

“Going back to the current time, I believe the recovery process is expected to be bumpy and very uncertain.

“It really reflects the nature of the economic shock which was very different from the previous recession (global financial crisis (2007-2008) and Asian financial crisis (1997-98)). In this sense, the SRR can only be raised when the economic recovery is truly more solid and sustainable,” Afzanizam noted.

RAM Rating Services Bhd’s co-head of financial institutions rating Wong Yin Ching said she does not expect the central bank to take action similar to that undertaken by BI in the near term, being given the country’s existing macroprudential controls and strong external position.

She said the potential downside risks to the Covid-19 Omicron variant and weaker-than-expected global growth for the still-nascent economic recovery remain.

“Increasing the SRR for Malaysian banks now, to mitigate risks from excess domestic liquidity, may be premature and counterproductive to the recent resumption of lending expansion,” he said. she stated.

In March 2020, the central bank cut the ratio by 100 basis points to 2.0% ahead of the automatic six-month loan moratorium measure. Banks were also given temporary flexibility to use Malaysian government securities and Malaysian government investment issues to comply with the SRR until the end of December 2022.

Sallie R. Loera