SRR cut unlocks liquidity, but credit growth tied to confidence

New Straits Times

20-05-2025

KUALA LUMPUR: Bank Negara Malaysia's surprise move to reduce the statutory reserve requirement (SRR) by 100 basis points effective May 16 is widely seen by economists as a timely liquidity-enhancing measure, with potential implications for credit growth and future monetary policy decisions.
The central bank said the move was aimed at bolstering liquidity in the domestic financial system and is estimated to inject approximately RM19 billion into the banking system.
Putra Business School economist Professor Dr Ahmed Razman Abdul Latiff said the move could support economic growth in the second half of 2025 by allowing banks to ramp up lending.
However, Ahmed Razman cautioned that the overall impact would still hinge on prevailing market sentiment and geopolitical developments.
"This injection of liquidity could translate into more active lending by banks, but it ultimately depends on consumer and business confidence, especially in light of global uncertainties and the current overnight policy rate (OPR)," he told the Business Times.
Ahmed Razman also noted that the SRR cut could be interpreted as a potential precursor to an OPR cut, though such a sequence is rare.
However, he believes the move to reduce the SSR ratio seems unexpected since Bank Negara can also boost liquidity by doing the more direct approach of reducing OPR.
"Cutting down SSR ratio to one per cent might lead to little option in the future to support the market growth since cutting down the SSR is always regarded as among the last choices," he said.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the SRR cut would accelerate lending, as funds previously parked under SRR earning zero interest can now be deployed.
With the SRR now at one per cent, Afzanizam said banks will have an additional RM19 billion to channel into lending for consumers, including mortgages, personal loans and hire purchase, as well as for businesses.
"And not to mention, they also can invest in govt securities and bonds or sukuk that will yield certain returns. All this will help to support domestic demand such as consumption and investment," he said.
On whether the SRR reduction is paving the way for an OPR cut, Afzanizam said it remains a possibility, depending on the economic fallout from global tariff shocks.
"Monetary policy decisions are highly dynamic, and Bank Negara has a suite of tools at its disposal. On that note, the OPR decision will be deployed in a timely fashion, depending on the severity of the impact from the tariff shock," he said.
In a recent report, Moody's Analytics economist Sunny Nguyen said the SRR cut gives Bank Negara crucial breathing room to evaluate several moving parts in the global economic environment.
These include the impact of US-led trade tariffs, the trajectory of inflation, and the policy direction of the US Federal Reserve (Fed).
"A lower SRR 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.
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.
"Will that pattern repeat? The odds favour a 25‐basis point rate cut to 2.75 per cent in September, so long as the headline CPI stays convincingly below 3 per cent year on year.
"And the Fed must resume its easing cycle, something futures markets are tentatively signalling will happen in September," she said.
Nguyen expects Bank Negara to maintain the OPR at 3.00 per cent until at least August.
However, she anticipates a 25 basis point cut to 2.75 per cent in September, provided inflationary pressures ease and the Fed begins its own rate-lowering cycle.
Economist Dr Geoffrey Williams said while the SRR cut frees up more liquidity for lending, actual credit expansion depends on demand from businesses and consumers.
"If businesses and consumers are willing to take loans, the RM19 billion becomes an effective stimulus. But if demand is weak, banks will simply hold the funds.
"This move keeps commercial interest rates more stable and aligned with the OPR, helping ensure that the cost of borrowing does not rise unnecessarily," he said.
In addition, Williams also highlighted that Bank Negara's use of the SRR reflects a prudential approach to monetary management, rather than immediately adjusting the OPR.
"At the moment inflationary pressures are moderate, growth is strong and banks are well capitalised so there is no need for a cut in the OPR.
"So it is a good move given uncertainty in the global market and avoids changing the OPR and monetary policy stance which are in good shape.
"Overall, I think it is a signal of prudential management rather than a signal of a likely change in policy," he added.