Bank Negara may need to do more as liquidity strains persist

New Straits Times

04-07-2025

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.