KUALA LUMPUR (May 2): Malaysia’s central bank is most likely to trim the statutory reserve requirement (SRR) before cutting the policy rate in July, said CIMB Securities.

A reduction in the reserve ratio — the proportion of deposits that lenders have to set aside at Bank Negara Malaysia (BNM) — could potentially inject RM10 billion of liquidity into the financial market that has shown signs of tightness, the research house said in a note.

“A clearer picture of the economic outlook should emerge by July, particularly with regard to the outcomes of ongoing trade negotiations and the conclusion of the US' 90-day tariff pause,” CIMB Securities said.

The SRR is currently at 2% after it was cut at the onset of the Covid-19 pandemic in March 2020 to ensure banks had sufficient liquidity to weather the crisis. The central bank previously stressed that the SRR is an instrument to manage liquidity and should not be taken as a monetary policy signal.

BNM is widely expected to stand pat on overnight policy rate (OPR) at next week’s review and closely watch the unfolding trade negotiations with the US. However, benign inflation opens the door for BNM to cut rates to support economic growth if conditions turn dour.

The benchmark interest rate has remained unchanged since it was raised in May 2023 thanks to resilient economic growth and manageable inflation. However, external risks are intensifying, and flash estimates showed that growth may have moderated to 4.4% in the first quarter of 2025.

“Should conditions deteriorate further, especially in terms of trade and overall economic performance, other options to support liquidity could be considered, including enhancing flexibility in the use of securities for SRR compliance as an additional policy tool,” CIMB Securities said.

In the meantime, signs of funding tightness have emerged even as overall liquidity in the financial system remains ample, judging from the declining liquidity positions of both commercial and Islamic banks since 2023, the research house flagged.

The benchmark three-month interbank lending rate has declined to about 3.65%. However, the spread with OPR has remained elevated at about 19.1 basis points above the pre-pandemic average — indicating persistent demand for liquidity over the past two years, CIMB Securities said.

“These developments point to sustained liquidity needs in the financial system,” the research house said. “A pre-emptive response may be warranted, particularly given the current environment of heightened uncertainty.”