Malaysia may raise reserve ratio this week

MALAYSIA'S central bank may ask lenders to set aside more funds as reserves this week rather than raise interest rates, according to Credit Suisse Group AG and Citigroup Inc.

Bank Negara Malaysia may increase the statutory reserve requirement ratio by 1 percentage point to 2 per cent, and keep the benchmark overnight policy rate at 2.75 per cent in its March 11 policy decision, Kun Lung Wu, an analyst at Credit Suisse, wrote in a report dated March 7.

The majority of economists surveyed by Bloomberg News expect Governor Zeti Akhtar Aziz to refrain from raising borrowing costs this week, with 16 of 20 analysts predicting the key rate will stay unchanged. Bank Negara, the first Asian central bank to boost rates last year, signaled in January that it may use other monetary policy tools to manage excess cash that’s building up in its financial system.

The central bank may argue an increase in the reserve requirement “is a move to reduce excess liquidity to prevent financial imbalances rather than an outright tightening in monetary policy,” Wu said in the note. “The hike in statutory reserve requirement would act as a tax on banks, but its impact on the economy should be limited.”

The statutory reserve requirement is the proportion of money banks are requirement to set aside in reserve. Bank Negara lowered level to 1 per cent in March 2009 during the global financial crisis. It was 4 per cent in November 2008.

Kit Wei Zheng, an economist at Citigroup, also sees the “risk” of a 100 basis-point increase in the reserve ratio at the upcoming policy meeting while the key interest rate is held at 2.75 per cent.

Azrul Azwar Ahmad Tajudin, an economist at Bank Islam Malaysia Bhd, expects the reserve level to be raised by 50 basis points to 1.5 per cent on March 11. A basis point is 0.01 percentage point. - Bloomberg