Kuala Lumpur: The 100-basis point reduction in the Statutory Reserve Requirement (SRR) ratio by Bank Negara Malaysia (BNM) last Thursday is designed to provide the Monetary Policy Committee with the necessary flexibility to evaluate the impact of US-led tariffs on exports, according to Moody’s Analytics.
According to BERNAMA News Agency, Moody’s Analytics economist Sunny Nguyen emphasized that this strategic move would also allow the central bank to assess the sustainability of the recent inflation spike driven by subsidies, and importantly, to anticipate the actions of the US Federal Reserve. Nguyen stated, “A lower SRR enables banks to extend more credit, thereby stimulating economic growth. Liquidity injections serve as a metaphorical loosening of a tie, preparing for potential changes.”
Nguyen further elaborated that BNM is expected to maintain the overnight policy rate (OPR) at three percent through August. Historically, BNM has initiated easing by first cutting the SRR, followed by interest rate reductions as data confirms a slowdown and inflationary pressures subside. This approach not only alleviates pressure on the ringgit but also assures foreign investors that the Malaysia-US yield gap will not decrease too rapidly.
Looking ahead, Nguyen highlighted the potential for a 25-basis point rate cut to 2.75 percent in September, contingent upon the headline consumer price index. This index is anticipated to rise with the gradual removal of subsidies on RON95 fuel. However, inflation must convincingly remain below three percent year-on-year as the US Federal Reserve is likely to resume its easing cycle, potentially starting in September as indicated by futures markets.
Nguyen noted that if the US Fed acts first, it would relieve pressure on the ringgit, allowing BNM to implement rate cuts without significantly affecting the local currency. A decrease in the Fed funds rate would also influence Malaysian economic growth, as cheaper global financing would help mitigate the tariff impacts on Malaysia’s electronics sector and ease pandemic-era corporate debt rollovers.
Nguyen concluded by projecting that both central banks are expected to reduce rates in September, with real GDP growth anticipated to decrease to around four percent from five percent in 2024, and further to 3.9 percent in 2026. Domestic demand will continue to drive the economy, bolstered by civil service pay increases and the construction of the East Coast Rail Link.