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Nikkei Markets

Malaysian central bank cuts required reserve ratio to 4%

Analysts estimate move to release more than seven billion ringgit into system

The central bank's next policy decision is due on Jan. 22.   © Reuters

KUALA LUMPUR (Nikkei Markets) -- Malaysia's central bank Friday unexpectedly announced half a percentage point cut in its so-called statutory reserve requirement ratio to boost flows in the financial system just days after it held the key policy rate steady at this year's final monetary policy review.

The ratio -- the proportion of deposits that banks have to set aside as cash - will be lowered to 3.00% effective from Nov. 16, Bank Negara Malaysia said in a statement. BNM last adjusted the cash reserve in Feb. 2016 when the rate was reduced by 50 basis points from 4.00%.

"The decision to reduce the SRR is undertaken to maintain sufficient liquidity in the domestic financial system," BNM said. "This will continue to support the efficient functioning of the domestic financial markets and facilitate effective liquidity management by the banking institutions." The SRR is an instrument to manage liquidity and is not a signal on the stance of monetary policy, it added.

A cut in the SRR ratio typically releases funds into the financial system, and eventually injects more cash into economy that helps fuel credit flow and spur consumption.

Loan growth has remained soft in recent months, expanding only 3.8% year-on-year in September, according to central bank's latest data. Loan approval meanwhile contracted more than 8% in September from a year earlier amid an uptick in bad loans.

The recent move comes as authorities prepare against potential threats to the export-reliant economy amid lingering U.S.-China trade tensions. Last month, Finance Minister Lim Guan Eng said the government has room for contingency plans to pre-empt any impact from a drop in global trade.

"We view the SRR cut as a clear precursor to the deteriorating growth outlook," said ING Asia Economist Prakash Sakpal. "We should get confirmation of this next week when third-quarter GDP numbers are released on 15 November."

Malaysia's economy will likely expand between 4.3% and 4.8% this year, according to the central bank's August forecast. Economic expansion accelerated in the second quarter when gross domestic product rose 4.9% from a year earlier.

Preliminary estimates show the decrease in SRR would release more than seven billion ringgit ($1.69 billion) into the financial system that would help support Malaysia's economic growth, said RHB Research Institute Economist Ahmad Nazmi Idrus.

"Cutting the rate makes sense given the tightness in interbank market, and to allow the banks to find some relief to facilitate financial transactions without increasing risks," said Mizuho Bank's Economist Vishnu Varathan.

Still, the move complements the earlier policy rate cut in May, and "doesn't mutually excludes lowering the policy rates as well," he said. Mizuho forecasts a 25-basis-point cut to the overnight policy rate in the first half of 2020.

On Tuesday, BNM kept the benchmark overnight policy rate unchanged as widely expected following its last of the six scheduled reviews this year, citing steady economic growth through 2020 amid subdued inflation. The central bank's next policy decision is due on Jan. 22.

-- Jason Ng and Gho Chee Yuan

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