BANK NEGARA LIKELY TO RAISE SRR BY FURTHER 1%
03 May 2011
BANK NEGARA is likely to raise the Statutory Reserve Requirement (SRR) of banks by another 1% at its monetary policy meeting in May 2011 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%. In Mar 2011, the Central Bank announced a 1% increase in the SRR to 2%, effective Apr 2011. It last reviewed the SRR in 2009.
LIQUIDITY ISSUE
" .... 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 (2011). Therefore, we expect another adjustment of 1% in May (2011), 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.
MANOKARAN added that despite the inflation rate hitting a 22-month high in Feb 2011, he did not expect any Overnight Policy Rate adjustment (OPR) for fifth consecutive time in the next MPC meeting in May 2011. " .... Given the economy in a lethargic mood, a steady interest rate is highly desirable and instrumental for the recovery process, especially when the Government is embarking on mega investment plans under the Economic Transformation Programme ...." said MANOKARAN.
OPR HIKE IN 2H-2011
He expected a single OPR hike in 2H-2011, 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.
LIQUIDITY GROWING AT DOUBLE DIGIT He said since May 2010, liquidity has been growing by double digits every month.
The higher SRR would mop up between RM6 bil and RM7 bil from the banking system, which is currently flush with excess liquidity of RM250 bil. Increasing the SRR is a one-off move that will soak up some RM6 bil from the banking system.
03 May 2011
BANK NEGARA is likely to raise the Statutory Reserve Requirement (SRR) of banks by another 1% at its monetary policy meeting in May 2011 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%. In Mar 2011, the Central Bank announced a 1% increase in the SRR to 2%, effective Apr 2011. It last reviewed the SRR in 2009.
LIQUIDITY ISSUE
" .... 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 (2011). Therefore, we expect another adjustment of 1% in May (2011), 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.
MANOKARAN added that despite the inflation rate hitting a 22-month high in Feb 2011, he did not expect any Overnight Policy Rate adjustment (OPR) for fifth consecutive time in the next MPC meeting in May 2011. " .... Given the economy in a lethargic mood, a steady interest rate is highly desirable and instrumental for the recovery process, especially when the Government is embarking on mega investment plans under the Economic Transformation Programme ...." said MANOKARAN.
OPR HIKE IN 2H-2011
He expected a single OPR hike in 2H-2011, 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.
LIQUIDITY GROWING AT DOUBLE DIGIT He said since May 2010, liquidity has been growing by double digits every month.
The higher SRR would mop up between RM6 bil and RM7 bil from the banking system, which is currently flush with excess liquidity of RM250 bil. Increasing the SRR is a one-off move that will soak up some RM6 bil from the banking system.
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