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New Straits Times
04-07-2025
- Business
- New Straits Times
Bank Negara may need to do more as liquidity strains persist
KUALA LUMPUR: A month after Bank Negara Malaysia reduced the amount of reserves that banks must set aside, early signs show the move has helped ease liquidity pressures in the financial system, but analysts say it may not be enough. The 100 basis-point reduction in the Statutory Reserve Requirement (SRR) on May 16 injected RM19 billion into the banking system. CIMB Securities said the additional cash helped bring down short-term borrowing costs, but deeper funding stress remains. "These actions had a measurable impact in easing funding conditions, as seen in the reduction in interbank rates," CIMB Securities senior economist Azri Azhar and head of research Michelle Chia said in a note. They were referring to the Kuala Lumpur Interbank Offered Rate (KLIBOR), the interest rate banks charge each other for short-term loans. A commonly watched measure, the spread between the three-month KLIBOR and the Overnight Policy Rate (OPR), has narrowed from 65 basis points (bps) to 49 bps since the SRR cut. However, that spread is still wider than the pre-pandemic norm of 35-45 bps, suggesting that borrowing costs in the system remain higher than ideal. In short, banks still face some difficulty accessing affordable short-term funds, which can limit their ability to lend. Credit growing faster than deposits One of the key reasons is that loan growth continues to outpace deposit growth. For the past 16 consecutive months, banks have been lending more than they have been able to collect from depositors. CIMB Securities said this has pushed the loan-to-deposit ratio to 87.9 per cent, close to its upper comfort limit. "Liquidity has improved, but it has not recovered to the more comfortable levels above RM60 billion, which support a more constructive loan-deposit ratio," the firm said. It added that the situation is further compounded by how Malaysians, both consumers and businesses, are choosing to hold their money. In May, fixed deposits, traditionally a stable source of bank funding, shrank by 1.2 per cent year-on-year. At the same time, foreign currency deposits surged by 16.7 per cent, as more Malaysians shifted their savings into US dollars or other currencies in search of better returns or to hedge against ringgit volatility. This trend reduces the availability of ringgit funding in the local banking system, making banks more reliant on short-term interbank markets to meet demand. External risks and policy room CIMB Securities said these funding pressures are occurring against a backdrop of uncertain global conditions, including the potential economic fallout from US President Donald Trump's tariff regime. It noted that Malaysia's economy grew 4.4 per cent in the first quarter of 2025, the slowest pace in a year, partly due to a front-loaded export push ahead of the anticipated tariff changes. More concerning, the firm said, is that money supply growth continues to lag behind nominal gross domestic product, signalling that monetary conditions remain tighter than ideal for an economy facing mounting external risks. With the SRR now at one per cent and the OPR unchanged, CIMB Securities said there is still policy space for further action, either by cutting interest rates or by making more liquidity available through additional SRR tweaks. It noted that funding pressures typically intensify toward year-end, with the KLIBOR–OPR spread widening sharply in December, reaching as high as 93 bps in 2022, 77 bps in 2023, and 73 bps in 2024. A preemptive move now, the firm added, could help Bank Negara avoid another seasonal crunch and keep credit flowing smoothly through the second half of 2025.
Free Malaysia Today
03-07-2025
- Business
- Free Malaysia Today
Malaysia rate cut bets grow as tariff talks weigh on outlook
Bank Negara Malaysia is expected to cut the overnight policy rate next week by 25 basis points to 2.75% to preemptively support growth, say analysts. PETALING JAYA : Expectations are growing for Malaysia's central bank to cut interest rates at its policy meeting on July 9, which is also the deadline for countries to reach trade deals with the US to avert swinging tariffs. Bank Negara Malaysia (BNM) is expected to cut the overnight policy rate (OPR) next week by 25 basis points to 2.75% to preemptively support growth, analysts at HSBC Holdings Plc and CIMB Group Holdings Bhd said in separate reports. Traders are pricing in a 40% chance of a rate cut within the next three months, according to swaps data compiled by Bloomberg. 'We expect the cut to materialise largely as a means of pre-empting a potential slowdown in domestic demand,' analysts Yun Liu and Madhurima Nag from HSBC wrote in a June 25 note. Private consumption may be impacted by the expansion of the sales and service tax and the government's plans to cut subsidies for the country's cheapest and most popular gasoline, RON95, according to the HSBC analysts. 'The impact of the latter should be limited, however, as authorities aim to keep the majority of the population shielded,' they added. The government has already flagged its plans to revise down its 4.5%-5.5% growth target this year. Malaysia's exports contracted by 1.1% in May, with CIMB's Azri Azhar and Michelle Chia citing that decline as evidence of persistent tariff uncertainties, soft global demand and weakening trade sentiment. It's unclear when Malaysia will reach a trade agreement with the US. Southeast Asian neighbour Vietnam has reached an accord in which its goods will be subject to a 20% tariff, according to US President Donald Trump. Credit momentum is also showing signs of broad-based moderation, while signs of softness in private consumption are becoming more evident, the CIMB analysts wrote in a July 2 note. 'These all point to a cut in borrowing costs at the July 9 meeting,' they said. To be sure, the central bank may still delay any move. This would imply that additional data may be required, namely the advance gross domestic product figures for the second quarter and trade figures for June and July, according to CIMB.
