This article first appeared in The Edge Financial Daily, on March 10, 2016.

KUALA LUMPUR: Bank Negara Malaysia (BNM) kept overnight policy rate (OPR) at 3.25% and the statutory reserve requirement ratio (SRR) at 3.5% yesterday.

In its monetary policy statement yesterday, BNM said the central bank’s operations continue to ensure that “there is sufficient liquidity to support the orderly functioning of the money and foreign exchange markets”.

It noted that the financial system “continues to be sound with financial institutions operating with sufficient liquidity buffers”.

However, BNM’s statistics showed a 86% contraction on the broad money M3 over the past four years. The sharp fall in the money supply raises the concern on the liquidity in the financial system.

Economists contacted by The Edge Financial Daily concurred that the shrink in M3 is significant, and that the concern is not baseless.

Nonetheless, they opined that the current scenario is still manageable and is not yet alarming. Hence, there is no urgency for the central bank to take further measures.

“The liquidity concern is real but manageable and we believe that BNM looks at more than just one indicator to decide on the cut of the SRR,” said United Overseas Bank (Malaysia) Bhd economist Julia Goh.

She said there are evidence and indicators that the country’s liquidity situation has eased up following BNM’s move to cut the SRR by 50 basis points in January.

She cited the recent downward trend of the Kuala Lumpur Interbank Offered Rates (Klibor) as one of the indicators of the ease of a possible tight liquidity situation.

The three-month Klibor climbed from 3.69% in June 2015 to a 12-month high of 3.84% at end-December 2015 — which was near the five-year peak of 3.87% recorded in mid-December 2014. With the extra liquidity released from the central bank as a result of the SRR cut, interbank rates eased towards 3.71% as of yesterday.

Goh said the reversal of capital outflow so far this year also helped boost money supply in the system. She believed the ringgit has started to find its footing, and that foreign reserves also contributed to an improved domestic liquidity condition.

Goh said the decline in the M3 could also be due to the non-conventional investment products that have entered the market in recent years. “Perbadanan Insurans Deposit Malaysia did not guarantee these products and therefore, it’s not reflected in the calculation of M3. This could be a possible explanation of the sharp decline in M3.” she said.

“In the fourth quarter of 2015, Malaysia’s economy grew 4.5% from a year earlier, which is higher than forecasted. This is a fairly commendable growth rate.

“While a further slowdown is expected, as seen from January’s exports and imports figures, there is no urgency for the central bank to cut the OPR or the SRR,” she said.

Exports in January dropped 2.8% year-on-year (y-o-y) compared to a 1.4% growth in December 2015. Imports grew 3.3% y-o-y and was slightly stronger against 3.2% in the preceding month. However, it was lower than economists’ forecast of 4.9%.

“We believe that the BNM is holding on to its options while waiting to see the effectiveness of the pre-emptive measures taken by the government in the revised Budget 2016,” Goh said.

Affin Hwang Capital Research chief economist Alan Tan concurs that the liquidity condition in the country is manageable.

“Whether BNM will eventually cut the SRR or not, we think that the liquidity situation has improved a lot from last year,” said Tan.

Tan said if the BNM were to cut the SRR, it would be more of a signal to the market that the central bank would provide liquidity.

“I don’t think there is a need to cut the OPR rate for this round and even for the rest of 2016 under the current environment,” he added.