Bank Negara Malaysia is reducing the statutory reserve requirement ratio from 4.00% to 3.50%

Bank Negara Malaysia (BNM) is reducing the statutory reserve requirement (SRR) ratio from 4.00% to 3.50%. This is also the first time since July 2011 that BNM had adjusted the SRR and this move will come into effect on 1 Feb16. The central bank said that lowering of the SRR will support the orderly function of the domestic financial markets and will also ensure sufficient liquidity in the domestic financial system.

Statutory reserve requirement is essentially the amount of funds that commercial banks are required by to keep with the central bank. SRR is a monetary tool for managing liquidity whereas the overnight policy rate (OPR) is the interbank rate at which banks lend to each other. BNM stressed that adjusting the SRR is not a signal on the stance of monetary policy as this would come under the OPR.

As widely expected the authority had maintained the OPR at 3.25%. Rhetoric from the central bank has turned slightly more dovish. The policy statement pointed out that "while the global economy continues to expand, the recovery in the advanced economies has not been as strong as earlier expected and the growth in the emerging economies has slowed", and that "the current heightened financial market volatility and uncertainties also pose additional downside risks to global growth". Against the backdrop of an uncertain global outlook, Bank Negara expects that the Malaysia economy will experience more moderate growth in 2016, after expanding by about 5% in 2015.

Given recent adjustments in administrative prices and the weaker ringgit exchange rate BNM expects the headline number to be higher in 2016 compared to 2.1% in 2015. The central bank pointed out that recent external and domestic developments have continued to affect the ringgit exchange rate and domestic financial markets. The statement highlighted that "the net external outflows have also led to a moderation in domestic liquidity". The authority iterated that its open market operations have ensured that there is sufficient liquidity in the financial system.