January 22, 2016 / 11:02 AM / 4 years ago

Malaysia c.bank seen taking more steps as liquidity remains tight

KUALA LUMPUR, Jan 22 (Reuters) - The Malaysian central bank’s surprise cut in reserve requirements may not be enough to fix the country’s funding constraints, with capital outflows and slow growth in bank deposits likely to force more easing measures, economists said.

On Thursday, Bank Negara Malaysia (BNM) cut the statutory reserve requirement (SRR) ratio to 3.5 percent from 4 percent, effective Feb. 1, while it kept its benchmark overnight policy rate (OPR) unchanged at 3.25 percent.

The ringgit touched a near three-week high on Friday, following the BNM move, while banking stocks also got a boost.

BNM also said it has injected 40 billion ringgit ($9.32 billion) into the market since early 2015 to boost liquidity.

Economists said the SRR cut could add around 6 billion ringgit to the domestic market.

But the central bank will need to do more, they said, and as it is unlikely to trim the overnight rate for fear of triggering more outflows, that will mean further SRR cuts.

“Malaysia’s banking system is facing very tight liquidity and slow deposit growth,” said ANZ economist Weiwen Ng. “Things are not going to improve in terms of liquidity. Hence it’s better to act now rather than later.”

DOWNSIDE RISKS TO GROWTH

BNM’s ratio cut “is a recognition that there are indeed downside risks to growth. And that these risks are getting greater,” he said.

The central bank did not respond to requests for comment.

Malaysia saw huge capital outflows last year as the ringgit was rocked by slumping commodity prices and a political scandal involving millions of dollars mysteriously deposited in Prime Minister Najib Razak personal bank account.

With the ringgit losing about a fourth of its value since the beginning of 2015, exporters preferred to hold foreign currencies. Banks’ loans-to-deposits ratio - a measure of their liquidity - rose to 91 percent at the end of November, near a record high, according to a BNM report.

The last time BNM cut the reserve ratio was during the 2008-2009 financial crisis, when the SRR was lowered from 4 percent to 1 percent in three months.

“There is room for further SRR cuts. However, BNM will only do so if liquidity conditions worsen,” said Teh Chi-cheun, chief executive of Pacific Mutual Fund Bhd.

Najib is expected cut expenditure when he revises the 2016 budget on Jan. 28 to reflect sliding oil prices. Foreign reserves hit a six-year low in September, though they have climbed modestly since then.

$1 = 4.2940 ringgit Reporting by A. Ananthalakshmi, Emily Chow and Joseph Sipalan; Editing by Richard Borsuk

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