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Thursday, April 14, 2011

Bank Negara likely to raise SRR again by 1%

Economists say it will further tighten liquidity.

There is a strong possibility that Bank Negara will raise the statutory reserve requirement (SRR) of banks by another 1% at its monetary policy meeting next month to further tighten liquidity, acccording to economists.

Selective capital controls may also be introduced to stem the large amounts of liquidity in the system.

The move to increase the SRR is not surprising as Bank Negara is moving towards normalisation of 4%.

Last month, the central bank announced a 1% increase in the SRR to 2%, effective April. It last reviewed the SRR in 2009.

“To address the liquidity issue, increasing interest rates is not so effective. The higher interest rates will merely attract more funds, and this will eventually increase inflation. Raising the SRR would be a more appropriate measure,” said MIDF Research chief economist Anthony Dass.

“We do not rule out further normalisation move in the SRR ratio towards 4% by the end of the year. Therefore, we expect another adjustment of 1% in May, raising SRR to 3% - a pre-emptive measure to manage the risk of this build-up of liquidity from resulting in macroeconomic and financial imbalances,” said AmResearch senior economist Manokaran Mottain.

He expected a single OPR hike in the second half of this year, once the domestic economy achieved steady but strong growth.

On selective capital controls, Anthony said this could be taxes on inflow or outflow.

“It can be either quantity based or price based. This is something which is already done in China, Indonesia, Taiwan and South Korea,” said Dass.

He said since May 2010, liquidity has been growing by double digits every month.

The higher SRR would mop up between RM6bil and RM7bil from the banking system, which is currently flush with excess liquidity of RM250bil.

Increasing the SRR is a one-off move that will soak up some RM6bil from the banking system.

Continue reading - Bank Negara likely to raise SRR again by 1%

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