KUALA LUMPUR (July 10): Bank Negara Malaysia appears to have tightened interbank liquidity via the auctioning of Bank Negara Interbank Bills (BNIB) and reverse repo, as the central bank pauses its overnight policy rate hike in the recent Monetary Policy Committee (MPC) meeting.

Maybank Research deemed the series of actions, which has driven the Kuala Lumpur Interbank Offered Rate (Klibor) higher of late, as “quasi-tightening” by BNM, after it held the benchmark interest rate unchanged at 3% last week.

“The one-month and three-month Klibor surged 25 basis points (bps) and 11 bps to 3.43% and 3.56%, respectively, into the MPC meeting on Thursday (July 6), which we think was largely driven by tighter interbank liquidity engineered by BNM, judging from the sudden net drain via BNIBs and lower allocation rates in reverse repo auctions recently,” said the research house in a note last Friday (July 7).

According to BNM's website, repurchase agreement transactions or repo is where BNM sells eligible securities such as the Malaysian Government Securities to banks, while committing to repurchase the equivalent securities on a specified date at a specified price that reflects the repo rate. Repo is used to absorb liquidity from the banking system, for tenures ranging from overnight to one year.  Reverse repo, on the other hand, is where BNM buys eligible securities from banks, while committing to resell the equivalent securities on a specified date at a specified price, providing liquidity to the banking system.

BNIBs, meanwhile, are short-term securities issued by BNM at a discount to their face-value. Only available and tradable between licensed banks, BNIBs are issued to enhance liquidity intermediation in the interbank money market. 

Maybank Research pointed to an unusually large RM5 billion BNIB tranche issued on June 23, and that issuances have totalled over RM20 billion since then — compared to infrequent issuances averaging less than RM1 billion a week previously.

It also said the allocation of BNM’s reverse repo auctions have dropped to about 63% on average in the past two weeks, from close to 100% before.

“We think this represents a quasi-tightening. The intention is unclear, but a higher interbank money market curve and Klibor will probably weigh more on corporate funding than households, in our view, as opposed to an OPR hike which would have broader implications,” it said.

Maybank observed that the timing of such changes — increased issuances of BNIBs and lowering reverse repo — is also close to the Financial Markets Committee statement on June 27, which mentioned that the ringgit's weakness was not reflective of Malaysia’s economic fundamentals while indicating that BNM would intervene to curb excessive foreign exchange moves.

“We don’t expect the quasi-tightening to last for too long — may slow in one-two weeks then stabilise eventually — but the Klibor curve may stay elevated for some months or longer, depending on the pace of slowdown in domestic growth and the trajectory of US rates pricing, in our view,” it said.

“Tentatively, we expect three-month Klibor to settle at around 3.65-3.70% by end of third quarter, or a total increase of 20-25 bps, then ease slightly towards the year-end assuming both domestic and global growth to slow more pronouncedly by then, but will reassess again when the interbank liquidity conditions reach a new equilibrium as the current gap between the highest and lowest individual fixing is still unusually wide at 17 bps due to uncertainties amid a transition in liquidity stance,” it added.