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Saturday, January 29, 2011

MALAYSIA - Rise in statutory reserve requirement expected

Industry observers believe that a hike in the statutory reserve requirement (SRR) by Bank Negara is likely at the next monetary policy committee (MPC) meeting in March.

The SRR is a monetary policy instrument available to Bank Negara to manage liquidity and credit creation in the banking system. It is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by the central bank to be large and long term in nature.

It is currently at a historical low of 1% from 3% to 4% in 2008.
*It means for every RM100 deposits, they can create RM10,000 in loans. 99:1 leverage! Money multiplier = 1/reserve ratio = 1/0.01 = 100

An economist from a local bank-backed brokerage said a rise in the SRR might be implemented to curb the inflow of hot money.

“Looking at current trends, the central bank will do it. If it feels hot money is coming in and that there is a need to avoid misalignment in asset prices, it will increase the SRR,” he said.

Hot money refers to funds which flow into a country to take advantage of a favourable interest rate, therefore obtaining higher returns.

On Thursday, the central bank maintained the overnight policy rate (OPR) at 2.75% as it considered the existing monetary policy stance as appropriate and consistent with the current assessment of economic growth and inflation prospects.

However, it said that it would consider other policy tools such as the SRR and macro-prudential lending measures to ensure domestic macroeconomic and financial stability.

Affin Investment Bank in its research note yesterday also said the SRR was likely at the next MPC meeting.

“There is a possibility that Bank Negara may raise the SRR, which was cut from 4% in October 2008 to 1% in February 2009, in the next MPC meeting, but keeping its policy rate unchanged,” it said.

Maybank Investment Bank said: “The latest monetary policy statement not only continued to highlight the risk to macroeconomic and financial stability from the volatile international financial market conditions amid increased global liquidity and hence short-term capital flows, but added that policy tools such as the SRR and macro-prudential lending measures may be considered."

“This raises the odds of the SRR rising in the next MPC (on March 11) and we are factoring in (more than) a 100 basis points adjustment.”

According to AmResearch Sdn Bhd senior economist Manokaran Mottain, a 1% hike in SRR can remove at least RM3.9bil from the banking system.

*POOF MAGIC MUCH? The market will squeeze and people will find it harder, if not impossible to pay back their existing loans. Hence, DEFAULTS ARE INEVITABLE!

Continue reading - The Star - Rise in statutory reserve requirement expected

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