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Malaysia[MYR]

Institutional framework

Guided by the Central Bank of Malaysia Act 2009 (CBA 2009) in promoting monetary stability, Bank Negara Malaysia pursues a monetary policy with the primary objective of maintaining price stability while providing a conducive environment for the sustainable growth of the Malaysian economy.

The Monetary Policy Committee (MPC) 1 , is responsible for formulating monetary policy and policies for the conduct of monetary policy operations. The MPC meets at least 6 times a year to deliberate on the appropriate level of the policy rate in safeguarding price stability while supporting economic activity. The Monetary Policy Statement (MPS) released after every MPC meeting is the main tool to communicate the policy decision.

The Bank uses the Overnight Policy Rate (OPR) as its key policy rate since April 2004 and it is the indicator of the Bank's monetary policy stance. The overnight rate is deemed to be an effective policy rate due to its minimal expectations content and high degree of controllability 2 . Under this framework, the OPR is effectively the target for the average overnight interbank rate (AOIR). In order to prevent excess volatility in the AOIR, the market rate is allowed to move within an interest rate corridor of ±25 basis points around the OPR set by the Bank.

Key features of the implementation framework

The Bank undertakes monetary policy operations to manage ringgit liquidity in the financial system, thereby ensuring that the operating target (AOIR) remains close to the OPR and the functioning of the interbank money market remains efficient.

Daily Market Operations

The Bank's monetary policy operations are conducted on a daily basis, which comprise both morning and evening sessions, executed via various combinations of monetary instruments. The operations are supported by the publications of liquidity forecasts (4 times daily) to communicate the intent of operations and changes to the level of liquidity throughout the day. Both liquidity forecasts and operations are announced and conducted via the Fully Automated System for Issuing/Tendering (FAST), a secure web-based system designed to facilitate the Bank's Open Market Operations (OMO) via tender or private placement basis, as well as primary issuances of ringgit (MYR) debt securities.

In the morning sessions, the Bank primarily uses uncollateralised direct borrowings to absorb liquidity from the banking system. These borrowings are auctioned on a competitive basis, and can have maturities ranging from overnight up to 6 months. The Bank can complement direct borrowings by conducting repo auctions of similar tenures which not only absorbs liquidity, but is also used to enhance liquidity in the secondary bond market.

The Bank may also issue central bank securities to absorb liquidity at longer maturities of up to 3 years, in the form of Bank Negara Monetary Notes (BNMNs) and Bank Negara Interbank Bills (BNIBs). Unlike BNMNs, BNIBs are only available and tradable between licensed banks and aim to enhance liquidity intermediation in the interbank money market. Foreign exchange (FX) swaps and outright sales and purchases of Malaysian Government Securities (MGS) are also part of the instrument toolkit to manage MYR liquidity in the banking system.

Towards the end of the day, the Bank conducts an overnight tender to mop-up any excess liquidity in the system, thus ensuring that the AOIR remains close to the OPR. In the event of residual surpluses or shortages following the completion of the overnight operations, the Bank makes available the overnight standing facilities, which sets a discount window of ± 25 basis points around the OPR. The Bank is able to borrow and lend at the floor and ceiling of the corridor respectively upon request by eligible institutions.

The counterparties for monetary policy operations, which comprise eligible onshore licensed banks (conventional, Islamic and investment banks), are able to participate directly in these operations, including standing facilities.

Statutory Reserve Requirement

The Bank also uses the Statutory Reserve Requirement (SRR) to manage liquidity, in which banking institutions are required to maintain cash balances in their Statutory Reserve Accounts equivalent to a certain proportion of their eligible liabilities – this proportion being the SRR rate. The SRR may be raised to manage the significant build-up of liquidity, which may result in financial imbalances and create risks to financial stability. Conversely, the Bank may lower the SRR if necessary, to support the transmission of monetary policy rates to retail rates. However, it is important to note that changes to SRR should not be construed as a signal on the stance of monetary policy, whereby the OPR is the sole indicator.

The current SRR has been lowered from 3.00% to 2.00% since 19th March 2020, and in addition, the Bank has provided temporary flexibility for all banking institutions to use long term government securities to meet the SRR compliance until 31 December 2022. The flexibility is part of the Bank's continuous efforts to ensure sufficient liquidity to support financial intermediation activities during the COVID-19 pandemic.

Islamic money market operations

Malaysia is unique in having a dual banking system, where both conventional and Islamic systems operate in parallel to provide financial products and services that could meet the diverse demands of customers. Liquidity in both systems are linked by customer transfer payments, as well as the participation of conventional banking institutions in the subscription and trading of Islamic banking instruments. The primary objective of Islamic money market operations is to ensure sufficient liquidity for the efficient functioning of the Islamic interbank market.

The Bank manages liquidity in the Islamic interbank market through the use of Shariah-compliant instruments, the main instruments being the Qard acceptance (loan) and Commodity Murabahah Programme. Both instruments are used to absorb liquidity with short maturities. For longer-term liquidity management, the Bank issues central bank securities such as Bank Negara Monetary Notes-i (BNMN-i) and Bank Negara Interbank Bills-I (BNIB-i) which are structured based on Islamic principles.

1

More information on the evolution of BNM's MPC can be found in the BNM Annual Report 2015. https://www.bnm.gov.my/documents/20124/829207/cp03_001_box.pdf

2

More information on Malaysia's interest rate framework can be found in the BNM Annual Report 2004. https://www.bnm.gov.my/documents/20124/830664/cp02_001_whitebox.pdf

Institutional setup of monetary policy decisions and operations

Policy decision body, size and composition Monetary Policy Committee.
The Monetary Policy Committee shall consist of the Governor, the Deputy Governors and not less than three but not more than seven other members. 1
Major mandates 2 As stated in the Central Bank of Malaysia Act 2009 (Act):
In promoting monetary stability, the Bank shall pursue a monetary policy which serves the interests of the country with the primary objective of maintaining price stability giving due regard to the developments in th economy.
The Monetary Policy Committee is responsible for formulating monetary policy and policies for the conduct of monetary policy operations.
In addition, the Act also states:
The monetary policy of the Bank shall be formulated and implemented autonomously by the Bank, without any external influence.
The monetary policy of the Bank shall be formulated only at a duly convened meeting of the Monetary Policy Committee.
Decision-making process Monetary Policy Committee is a collegial decision-making body, whereby the decision-making process seeks consensus among the members.
Frequency / length of meetings 6 times a year
Frequency of announcements Same
Main policy target Overnight policy rate (OPR)

Overview of key features

Key policy rate Overnight Policy Rate (OPR)
maturity (days) O/N
Operating target Average O/N interbank rate
maturity (days) O/N
Standing facilities Lending, deposit
Corridor width (bp) 50
Reserve requirements Yes
maintenance period 2 weeks
Main operation 3 Direct borrowing, RS, RP, CB Bills, FX swaps
functions
maturity (days)
regular interval
frequency
Overall frequency 2 x d
Discretion left to operational desk Choice of instruments, timing, amounts and rates (other than overnight)
Key policy signals via
announcement
keynote tender
standing facility
other

Monetary policy communication

Explicit use of forward guidance -
Timing / media of policy announcement At 3.00 pm on day 2 of MPC meeting; central bank website
Policy announcement and documents Decision on the policy rate, the Overnight Policy Rate (OPR), in the Monetary Policy Statement
Explaining policy decisions OPR decision followed by assessments of the global and domestic economic conditions and outlook, assessment on the inflation outlook and assessments on the balance of risks and monetary policy stance
Dissemination of minutes (timing / media) -
Content of minutes -
Publication of forecasts 4 Bank's GDP and inflation forecast for the year are published in the BNM Annual Report (in the Economic and Monetary Review since 2020) published in March of that year, and these forecasts for the year and the following year in the Ministry of Finance's Economic Report in October/November
Publication of projected path of policy rate 5 -

Reserve requirements: ratios and size

Main functions served Liquidity management
Domestic currency 2.0% 6
Foreign currency -
Average 2.0%
Required reserves MYR29.8bn 7
Required reserve as % of GDP 0.2%
Actual reserves MYR2.8 bn 8
Actual reserve as % of GDP 0.2%

Main features of reserve requirements

Averaging Y 9
Carry-over N
Type Lagged
Maintenance period 2 wks
end (day) 15th, end-month
Calculation period 2 wks
end (day) 15th, end-month
Lag before maintenance 2 wks
Vault cash N
restrictions
Remuneration N
average rate
marginal rate
Framework last changed 15 May 2020

Liquidity position and forecasting

Structural Position Surplus
Most volatile factor(s) Transfers between conventional and Islamic accounts, Currency in circulation, Capital flows
Most unpredictable factor(s) Government sector flows, transfers between conventional and Islamic accounts
Forecast horizon(s) 1 month
Frequency Daily
Frequency of revision 4 times a day
Forecast published? Yes, daily

Standing facilities: lending / market ceiling

Name Standing facility
Form Reverse repo (=RP), collateralised murabahah arrangement and cross border collateral arrangement (CBCA)
Pricing method OPR + 25bps
Maturity O/N
Access limited by/to Financial institutions that are interbank participants; eligible collateral
Function(s) Maintain ceiling of operating band

Standing facilities: deposit / market floor

Name Standing facility
Form Deposit
Pricing method OPR minus 25bps
Maturity O/N
Access limited by/to Financial institutions that are interbank participants
Function(s) Maintain floor of operating band

Open market operations: repo or reverse repo

Name/Type 10 (i) RS
(ii) RP
Maturity Up to 1 year
Frequency (i) Daily
(ii) As needed
Pricing method Auction
Access limited by/to Financial institutions that are interbank participants
Function(s) (i) Liquidity withdrawal
(ii) Liquidity injection

Open market operations: central bank bills

Name Bank Negara Monetary Notes; Bank Negara Interbank Bills (BNMNs; BNIBs)
Total issuance RM0.0 bil (as of 31 Aug 2021)
Maturity Up to 3 years
Restrictions on possible maturities The longest maturity is capped to 3 years (for BNMN)
Pricing method Multiple price competitive auction
Access limited by/to BNMNs: no restriction. BNIBs: only licensed banks and licensed investment banks are allowed to purchase and trade. Both BNMNs and BNIBs issuances are conducted via the Principal Dealer network.
Discretion left to operational desk Size & maturity profile of BNMNs, BNIBs.

Open market operations: FX swaps

Maturity 1-12 months
Frequency As required
Pricing method Over the counter (OTC) at prevailing market rate
Access limited by/to Financial institutions that are interbank participants
Function(s) Liquidity Management

Other significant liquidity management means

Name/Type 11 (i) DB
Form (i) Term deposit
Frequency (i) 2xday
Maturity (i) O/N to 3M
Pricing Method (i) Auction
Access limited by/to (i) Financial institutions that are interbank participants
Function(s) (i) Absorb excess liquidity

Settlement systems and intra-day liquidity facilities

Settlement system RTGS, since 1999
Intra-day liquidity facility Intra-day collateralised withdrawal
Charge Admin fee RM12 per RM5 mil withdrawal 12
Foreign currency settlement system USD PvP link to Hong Kong USD CHATS and Renmimbi Onshore Settlement Services
CLS participation by banks Yes, commercial big banks only
Other settlement system(s) Euroclear Link for settlement of Euroclearable bonds 13

Collateral

Standing facilities: List of eligible collateral Ringgit denominated securities:
1. securities issued by the Government of Malaysia;
2. securities issued by the Bank;
3. securities issued by EMEAP-member governments;
4. securities issued by non-EMEAP member governments with minimum investment grade international ratings of Baa3, BBB- , whichever lower, as defined by Fitch Ratings (“Fitch”), S&P Global Ratings (“S&P”) and/or Moody’s Investor Services, Inc (“Moody’s”);
5. securities with explicit guarantee by the Government of Malaysia or EMEAP-member governments or non EMEAP-member governments with minimum investment grade international ratings of Baa3, BBB- , whichever lower, as defined by Fitch, S&P and/or Moody’s;
6. securities issued by multilateral development banks or multilateral financial institutions with AAA international rating, as defined by Fitch, S&P and Moody’s;
7. securities issued by non-residents with AAA domestic ratings and minimum investment grade international ratings of Baa3, BBB- , whichever lower, as defined by Fitch, S&P and/or Moody’s;
8. corporate bonds and sukuk with minimum A3 or A- domestic ratings as defined by Rating Agency Malaysia (RAM) and Malaysian Rating Corporation (MARC); and
9. Bankers Acceptances (BAs) and Negotiable Instruments of Deposits (NIDs) issued by onshore licensed banks with minimum AAA domestic rating; and
10. other securities that may be specified by the Bank from time to time.

Non-ringgit denominated securities:
1. Securities issued by Government of Malaysia; 2. Securities issued by the Bank
3. Securities issued by EMEAP-member governments in, USD, GBP EUR, JPY and the respective home currencies;
4. US Treasury Securities and UK Gilts;
5. Securities issued by multilateral development banks or multilateral financial institutions with minimum AAA international rating, and securities issued by International Islamic Liquidity Management Corporation (IILM); provided that the securities above are issued in USD, GBP, EUR or JPY;
6. Home currency sovereigns issues and cash collateral of countries which BNM has signed CBCA; and
7. Other securities that may be specified by BNM from time to time.
Standing facilities: Discretion of central bank on collateral 14 Complete discretion
Open market operations: List of eligible collateral Ringgit denominated securities issued by the Government of Malaysia and BNM, selected corporate bonds and sukuk with minimum A3 or A- domestic ratings
Open market operations: Discretion of central bank on collateral 15 Complete discretion

Dissemination of operational information: liquidity forecast

Forecast published? Yes
Channel(s) Fully Automated System for Issuing and Tendering (FAST), the central bank transaction system at https://fast.bnm.gov.my/
Bloomberg (BNM), Reuters (NEGARA)
Timing 9.30 am, 10.45 am, 3.30 pm, 4.00 pm
Remarks Liquidity forecast made public since April 1998. Format of forecast amended in August 1999 due to additional information from RTGS implementation.

Dissemination of operational information: open market operations

Volume and price published? Yes – direct borrowing, repo/reverse repo, BNM Papers 16
Channel(s) Central bank transaction system (FAST) at https://fast.bnm.gov.my/
Bloomberg (BNM), Reuters (NEGARA)
Timing Tender results for direct borrowing and repo/reverse repos – about 15 minutes after the tender closes
Tender results for BNM Monetary notes – about 30 minutes after the tender closes

Dissemination of operational information: standing facilities

Lending facility usage: Channel(s) Not published 17
Lending facility usage: Timing Cutoff at 5.30 pm
Deposit facility usage: Channel(s) Not published
Deposit facility usage: Timing Cutoff at 5.30 pm

Other information dissemination

Type Intra-day changes in government & federal statutory agency deposit balances at BNM, Net maturity or issuance proceeds of Federal Government and BNM issued debt securities, Coupon or dividend payments of Federal Government and BNM issued debt securities, Intra-day net payments from the Islamic and conventional sub-sectors
Intra-day changes due to BNM currency operations 18
Channel(s) Central bank transaction system (FAST) at https://fast.bnm.gov.my/
Bloomberg (BNM), Reuters (NEGARA)
Timing 9.30 am, 10.45 am, 3.30 pm, 4.00 pm

1 The MPC currenctly comprises 8 members -Governor, 3 Deputy Governors, 2 Assistant Governors and 2 external member

2 Describe as well the legal status of the mandate and involvement of government

3 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).

4 For instance, economic and inflation forecasts related to policy decision.

5 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.

6 New required reserved effective from 20 March 2020. All banking institutions may recognise holdings of long term government bond as part of their SRR compliance effective 16 May 2020 until 31 Dec 2022.

7 As of 31 Aug 2021

8 The actual reserves represents only the cash portion of SRR. The remaining reserves are in the form of MGS and MGII.

9 Daily shortfall or excess limited to 20% of required reserve.

10 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).

11 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.

12 Effective 1 Jan 2017, new Admin fee RM12 per RM5 mil withdrawal is imposed.

13 The Euroclear Link enables Real Time Electronics Transfer of Funds and Securities (RENTAS) participants to leverage on RENTAS to gain access to Euroclearable securities via Euroclear Bank. Likewise, Euroclear is a participant of RENTAS and is able to settle RENTAS deposited securities for its clients.

14 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

15 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.

16 The first liquidity forecast at 9.30 am incorporates announcement of BNM’s operational intentions which includes tender invitations for borrowings, repo or reverse repo. These may involve competitive auction (for conventional) and mainly non-competitive auction (for Islamic). Typically at 11am, the full result of the auctions including the final amount offered (may be upsized or downsized from original announced amount occasionally), amount bid/offered by market participants, the highest/lowest/average successful rates or prices, cut-off percentages, maximum allotment limit per bidder (if any) and bid amount rejected.

17 Standing facility (lending) usage is infrequent. End-of-day liquidity fine-tuning is typically via late-day overnight direct borrowing auctions. Aggregated in ‘Other BNM Market and Non-Market Activities’ forecast item. Maturities are aggregated in ‘BNM MM & Repo Maturities’.

18 Liquidity impact from intra-day changes in government & federal statutory agency deposit balances at BNM are disclosed as ‘Government Operations’. Liquidity impact from intra-day changes due to BNM currency operations are also aggregated in ‘Other BNM Market and Non-Market Activities’ forecast item. There is no net liquidity impact from intra-day net payments from the Islamic and conventional market sub-sectors. However, these do impact distribution of liquidity between the two sub-sectors. An inflow (outflow) to one sub-sector is effectively and outflow (inflow) from another.