Malaysia raises reserve requirements

Malaysia has held rates but raised the proportion of deposits banks must keep with the central bank, as signalled by the bank. The reserve requirement will double from 1 to 2 per cent, effective April 1. The overnight policy rate remains at 2.75 per cent.

Raising the reserve requirement has become a favoured alternative to raising rates in countries wanting to tighten without attracting certain types of destabilising short-term capital inflows. Bank Negara Malaysia described the use of the reserve requirement as “pre-emptive” and “an instrument to manage liquidity and not a signal on the stance of monetary policy”. From the Bank:

Large shifts in global liquidity have resulted in significant capital flows into emerging economies, and in particular, into the Asian region. The consequent build-up of liquidity in the domestic financial system, if not managed carefully, could create risks to macroeconomic and financial stability. In the case of Malaysia, the assessment is that the increase in liquidity in the domestic financial system has thus far been well intermediated. The decision to raise the SRR is now undertaken as a pre-emptive measure to manage the risk of this build-up of liquidity from resulting in macroeconomic and financial imbalances.