Analysts cautious on SRR’s ability

PETALING JAYA: While Bank Negara’s decision to raise the statutory reserve requirement (SRR) by 100 basis points to 4% is to address the build-up of liquidity, analysts remain cautious on its ability to absorb liquidity, as a 1% increase only absorbs an extra RM7bil in the system. As of May, there were some RM230bil to RM240bil in excess liquidity in the system.

On Thursday, Bank Negara decided to leave the overnight policy rate (OPR) unchanged at 3% while it raised SRR by another 100 basis points to 4%.

However, economists do concede that if the SRR is left unchecked, financial imbalances will alleviate the risk of financial stability.

This 100 basis points increase will essentially normalise the SRR back to the pre-2009 financial crisis levels of 4%. The SRR was maintained at this level from September 1998 to November 2008.

Despite the SRR’s increase from 1% to the current 4%, it is still significantly below its 13.5% peak in June 1996, as well as the post-1997 financial crisis 12-year average of 4.9%.

“Much will depend on the inflow of speculative funds. If the magnitude of inflow remains significant, the possibilities to introduce selective inflow capital control cannot be ruled out,” said MIDF Research economist Anthony Dass.

A banking analyst from OSK Research said even when the SRR was increased in stages from 9.5% in April 1994 to a historical peak of 13.5% in June 1996, there were no visible effects on loans growth, which continued to climb from 14% to a peak of 35% from April 1994 to Feb 1997.

“It was only when economic conditions worsened amid a spike in the loans-to-deposit ratio (LDR) to over 94% did we start to notice a corresponding slowdown in loans growth,” he said.

“Given that we expect gross domestic product growth to remain intact at 5.6% for 2011 and the current system LDR of 84% is still off the optimum 90% to 92% level that most banks are comfortable with, we believe that any increase in SRR even to 6% is unlikely to hamper loans growth,” said the OSK analyst.

Meanwhile, Dass said that the measure of leaving the OPR unchanged at 3% is a telling sign that they are leaning more towards growth than inflation. This is because the risk of inflation is still high and is expected to peak in the third quarter of 2011.

“There is willingness to allow real returns to erode further in the near term while acknowledging inflation risk still remains. We believe that with 2011 economic growth likely to be undermined by the global uncertainties, a further hike in interest rates can alleviate the household debt crisis,” said Dass.

He added that inflationary pressure would come from rising food and fuel prices impact from the recent tariff hike and potential subsidy rationalisation plans.

However, this inflationary pressure will be muted by the firm ringgit against the US dollar and some level of output gaps which will reduce some levels of cost pressure.