INDIVIDUAL ASSIGNMENT – MONETARY POLICY AND

THEORY (ECO531)

PREPARED BY:
NO. NAME STUDENT NO. CLASS/GROUP
1 MOHAMAD ILYAS BIN ZAMARI 2022745821 BA242 2G

PREPARED FOR: MADAM FAUZIANA BINTI FAUZI@MAT

RAWI
DATE OF SUBMISSION: 22nd June 2022
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NO. TABLE OF CONTENT PAGE
1 INTRODUCTION 3
2 MONETARY POLICY IMPLEMENTED BY
BANK NEGARA MALAYSIA TO FIX
ECONOMY DURING COVID-19
• Maintain tight monetary policy 4
• Reduce statutory reserve requirement 4
ratio (SRR)
• Bank rate and discount rate structure to 5
be streamlined.

3 CONCLUSION 6
4 RECOMMENDATION 6

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 INTRODUCTION
Pandemic COVID-19 was really an impact in every country in the world. Malaysia also not
escape from the effect from the virus. This pandemic not just attack on human itself; they also
give impact on every sector in a country such as economy, tourism, medical and others.

Monetary policy is a set of principles that assist a country's monetary authority in managing
the supply of money and stabilizing economic growth (Friedman, 1968). In Malaysia, Bank
Negara Malaysia (BNM) implements monetary policy in accordance with Section 22 of the
Central Bank of Malaysia Act 2009 by influencing the interest rates that borrowers must pay on
their loans and depositors earn on their deposits.

Monetary policy will be tightened during the peak of economic overheating and when the
threat of inflation is strong by withdrawing funds from the banking system and hiking interest
rates. People will be encouraged to save more and spend less as interest rates rise. It would
also make borrowing money more expensive for consumers.

This will drive consumption and investment to slow to more sustainable levels, reducing the
likelihood of rising inflation. When the economy is sluggish, funds are pumped into the banking
system to lower interest rates, causing expenditure and borrowing to rise. Increased
consumption and investment would drive further economic activity, resulting in increased
income, employment, and economic expansion.

At this point, we will see how BNM use monetary policy to be implemented to help Malaysia
economy during pandemic COVID-19 back to the glory days. We also want to see why this
policy is important to a country to help not just economy but country employment, economic
growth and inflation.
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 MONETARY POLICY IMPLEMENTED BY BANK NEGARA
MALAYSIA TO FIX ECONOMY DURING COVID-19
1. Maintain tight monetary policy

Maintaining tight monetary policy is first monetary measure that being introduce by Bank
Negara Malaysia for stability of financial markets. Most of all of know that during the pandemic
hit on Malaysia, there slowdown in economic growth. Maintaining monetary policy is function to
improve the basis on which the prospects for medium and long-term sustainable growth would
be strengthened. Monetary Policy Committee (MPC) of Bank Negara also decided to
maintaining the Overnight Policy Rate (OPR) at 1.75% on 2021. MPC has expected that upward
slant but still stay moderate, owing to the economy's persistent excess capacity and labor
market slack. Based on graph below, we can see by lowering OPR, there will be domino effect
of lower interest rate during the pandemic COVID-19. Banks are also expected to reduce
variable home loan monthly payments proportionally; however, clients will still have the option to
decrease their loan length instead. During 11th May 2022, BNM just increase the OPR from
1.75% into 2%.

Figure 1: Overnight Policy Rate (OPR) Malaysia.

2. Reduce statutory reserve requirement ratio (SRR)

Decrease the statutory reserve requirement ratio (SRR) for commercial, merchant banks and
finance company from level of 13.5% to 10% of their eligible liabilities. This tool is used to
improve the effectiveness of the intermediation process rather than adding liquidity to
maintaining balances of the system. This will also neutralize the increased liquidity provided to
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the banking sector as a result of the SRR decrease. Direct interbank lending can slow down the
base money growth. BNM in 2021 has announced a 100-basis-point-cut in SRR ratio from 3%
to 2%. As a result, main dealers can now recognize up to RM 1 billion in Malaysian Government
Securities (MGS) and Malaysian Government Investment Issue (MGII) as part of SRR
compliance. This combined step will inject around RM 30 billion into the banking system.

Figure 2: Statutory Reserve Requirement (SRR) ratio.

3. Bank rate and discount rate structure to be streamlined.

Bank Negara Malaysia (BNM) has increased Overnight Policy Rate (OPR) from 1.75% to 2%
during 11th May 2022. This situation happens when BNM has been pressured due to higher-
than-expected inflation and a faster-than-expected monetary policy normalization by major
central banks. It is not just because of COVID-19, there also because of Russia-Ukraine crisis.
As a result of recent developments, the term structure of interbank and lending rates no longer
reflects market conditions. The shorter end interbank rates tend to reflect a limited number of
financial institutions' unusually constrained liquidity condition. There also growth rebound
research said that this happens because Malaysia's yield premium over US Treasuries shrinking
and the US dollar index strengthening due to increased demand for safe-haven assets amid
heightened geopolitical uncertainty, the ringgit managed to gain 0.1% versus the greenback.
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Figure 3: Bank Policy Rate

 CONCLUSION
Monetary policy is critical in implementing economic growth by stabilizing and influencing
through a variety of ways. For example, monetary policy employs its powers to effectively check
money supply in order to ensure price stability in the medium to long term when an increase in
price level is assessed to be a monetary event. The anticipation in economic activities will be
stronger, which will lead to higher consumer spending and attractive company investment by
lowering lending rates, resulting in more investment activity and the purchase of customer
durables. All of this has the potential to have an impact on the country's employment, economic
growth, and inflation. It measures the overall health of a country's economy and financial sector.

RECOMMENDATION
BNM may demand Malaysian commercial banks to keep a portion (or a mix of portions) of their
deposit liabilities (reserves) as vault cash and or deposits with it. The fractional reserve system
restricts the amount of loans that banks may make to the domestic economy, hence limiting the
supply of money. To boost positive economic growth, the government will need to cut the rate of
fixed necessary reserves, which has an inverse connection with the market's total money
supply. Moreover, The Central Bank of Malaysia is in charge of issuing licenses or operating
permits to commercial banks as well as regulating the banking system's functioning. It can use
this advantage to urge banks to take actions such as credit constraint or growth, higher savings
mobilization, and export promotion through financial support, which they might not undertake
otherwise based on their risk/return assessment. Last but not least, To boost good economic
growth, the government must instruct commercial banks in the nation to ensure adequate
money supply across all businesses and sectors allowing Malaysia's economy to flourish
positively and in balance. 6