BNM maintains key rate, raises SRR to 2pc

As expected, Bank Negara Malaysia (BNM) left borrowing costs unchanged at 2.75 per cent yesterday but raised the amount of money banks must keep at the central bank.

Starting in April, the statutory reserve requirement (SRR) will be doubled to 2 per cent.

It said that the decision to raise the SRR was to manage the risk of excess liquidity from large shifts in capital flows into the Asian region which would result in financial and macroeconomic imbalances.

In the case of Malaysia, the assessment is that the rise in liquidity in the domestic financial system has thus far been well-managed.

BNM also said the SRR is an instrument to manage liquidity and not a signal on the stance of monetary policy like the Overnight Policy Rate (OPR).

The SRR ratio was cut to 1 per cent in March 2009 from as high as 4 per cent in October 2008.

In its analysis of the domestic economy, the Monetary Policy Committee said there is growth in private consumption as well as business spending activities despite modest growth in exports.

While growth is expected to be moderate in the earlier part of the year, it is likely to improve during the course of the year, driven by strong expansion in domestic demand, led by private consumption.

"Private investment is also projected to strengthen, underpinned by the improving outlook for the domestic economy and further expansion of new growth industries."

HSBC Bank said BNM appears to be upbeat on domestic growth prospects.

"Even if external demand may still be relatively lacklustre in its view, the domestic side of things appears to be giving the central bank much comfort," remarked economists Wellian Wiranto and Namrata Mittal.

"With today's statement, it is quite clear that some form of response is coming fairly soon in the form of rate hikes ... not because of oil in and of its own, but due to uptick in demand to show how comfortable it is with domestic demand growth."

Inflation is not as urgent an issue here as elsewhere, but BNM is already hinting at the possibility of re-hiking again soon, shifting focus towards demand-pull forces. 

Bank of America Merrill Lynch economist Dr Chua Hak Bin expects the central bank to begin tightening from the next monetary policy meeting in May, when inflation climbs above 3 per cent.

"Another round of fuel price hikes may occur sooner to contain escalating fuel subsidy costs."

Chua also expects BNM to continue normalising the SRR, bringing the rate to 4 per cent by the year-end.

Bank of America Merrill Lynch expects a 50 basis points rate rise for the OPR this year to 3.25 per cent.







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