Markets surprised by Bank Negara's RM19bil liquidity injection

New Straits Times

09-05-2025

KUALA LUMPUR: The statutory reserve requirement (SRR) reduction is a "quasi-easing" measure that caught markets off guard.
But the move by Bank Negara Malaysia on Thursday may preserve the country's financial market competitiveness amid a wave of regional monetary easing, said Hong Leong Investment Bank Bhd (HLIB).
HLIB said the move came as a surprise given seemingly comfortable liquidity position of the banking sector.
It pointed out that the sector's liquidity coverage ratio stood at a healthy 152 per cent as of March 2025, while the loan-to-deposit ratio remains comfortable at 87.6 per cent, still below its five-year peak of 89.7 per cent.
Deposits are growing steadily at 3.0 per cent year-on-year, while credit demand remains strong and fixed deposit competition is relatively muted.
HLIB said the gradual decline in the three-month Kuala Lumpur Interbank Offered Rate (KLIBOR) since early this year from 3.73 per cent to 3.63 per cent further supports the view of sufficient interbank liquidity.
"We believe this move, while seemingly accommodative, is primarily aimed at preserving Malaysia's financial market competitiveness amid regional easing trends.
"Rather than indicating economic unease necessitating a monetary policy adjustment, it likely reflects a proactive stance against potential external risks," the firm said.
Bank Negara unexpectedly slashed the SRR ratio by 100 basis points to one per cent yesterday, marking the first such move since March 2020.
The cut is expected to inject about RM19 billion in additional liquidity into the banking system.
By utilising an SRR cut instead of an OPR reduction, HLIB said the central bank strategically avoids direct pressure on the ringgit and the associated risk of imported inflation.
Based on its calculations,the firm said the additional liquidity could boost bank net profits by one to three per cecnt, providing a buffer against a potential rate cut.
"Our house view remains that a 25 basis points OPR cut is likely in the second half of 2025," it added.
HLIB maintained its "overweight" stance on the banking sector, citing a favourable risk-reward profile with sector valuations at 1.09 times price-to-book value (P/BV), a 0.5 standard deviation below the 10-year average.
The firm also said the sector has an attractive average dividend yield of 5.1 per cent and resilient earnings capacity backed by substantial pre-emptive provisioning buffers.
MIDF Research said the reduction of the SRR, the lowest level in 14 years, is a proactive measure to ensure sufficient liquidity amid heightened concerns of the effects of trade war and risks of global slowdown.
"This may encourage banks to extend more credits to the economy and support further expansion in the domestic economic activities.
"For the record, banking loan growth moderated to 5.2 per cent year-on-year in March 2025, slower than 5.5 per cent in December 2024 and average 5.9 per cent rise in 2024," it said.
UOB Global Economics & Markets Research said the move will help support continued lending activities to ensure stable economic activity.
Following the dovishness in the latest monetary policy statement and the SRR cut, the firm expects two 25 basis points OPR cuts, one each in the third and fourth quarter of 2025, from status quo previously.
"This will take the OPR to 2.5 per cent by end-2025. The Monetary Policy Committee (MPC) will next meet on July 8-9, which coincides with the end of the 90-day reciprocal tariff pause that could bring the tariff rate for Malaysia back up to 24 per cent from the current baseline 10 per cent tariff imposed," it said.