BNM's surprise SRR cut sparks speculation of possible OPR reduction

New Straits Times

13-05-2025

KUALA LUMPUR: Bank Negara Malaysia (BNM) is laying the groundwork for potential interest rate cuts after its surprise move to reduce the statutory reserve requirement (SRR) by 100 basis points last week, according to Moody's Analytics.
In a report, economist Sunny Nguyen said the SRR cut, which injects about RM19 billion in liquidity into the banking system, gives BNM crucial time to assess the impact of US-led trade tariffs on exports, determine whether recent inflationary pressure is temporary, and monitor the next steps by the US Federal Reserve.
"A lower SSR allows banks to lend more, boosting economic growth by increasing credit availability. Liquidity injections are the policy equivalent of loosening your tie in case you decide to change shirts," she said in a note.
She expects the overnight policy rate (OPR) to remain at 3.00 per cent through August, with a likely 25-basis point cut to 2.75 per cent in September—provided inflation remains under control and the Fed begins easing.
Nguyen noted that in the past (namely in 2009, 2016 and 2020), the central bank's playbook when markets were jumpy and the ringgit was on the defensive opened with an SRR cut. Once data confirmed an economic slowdown and inflation was no longer a concern, it followed with rate cuts.
"That sequencing minimises foreign exchange volatility. Banks feel the relief immediately, and portfolio investors don't panic about a narrowing Malaysia‐US yield gap," she said.
Historically, BNM has followed a predictable sequence of loosening the SRR ahead of rate cuts when inflation is under control and economic conditions weaken. This approach helps reduce volatility in the foreign exchange market, offers immediate relief to banks, and reassures investors concerned about narrowing interest differentials with the US.
Nguyen noted that if the US Federal Reserve cuts rates first, it would ease pressure on the ringgit, allowing BNM to act without causing significant damage to the local currency.
She also said that a lower Fed funds rate would benefit Malaysia by providing cheaper global financing, which would help mitigate the impact of tariffs on Malaysia's export-heavy electronics sector.
Additionally, it would ease the rollover of pandemic-related debt.
"In that environment, a token 25‐basis point cut to the OPR would be more about signalling that the central bank stands ready to act. However, if the Fed stays on hold for longer, or the unwinding of fuel subsidies sends inflation too high, BNM may be content to keep the OPR at 3 per cent.
"The extra liquidity in the system will keep money market rates soft and ensure that credit flows, while the headline policy rate would protect the ringgit by maintaining the yield advantage," she said.
Despite these challenges, Malaysia's inflation is projected to rise to 2.5 per cent by year-end, while GDP growth is expected to slow to 4 per cent in 2025 from 5 per cent in 2024.
Domestic demand, buoyed by civil service pay increases and infrastructure projects like the East Coast Rail Link, will remain a key economic driver even as net export momentum slows.