Festival Fund Return To Curb Malaysia Rates

Malaysian interbank interest rates are expected to fall over the next few weeks as funds withdrawn for two major festivals are returned to the banking system, dealers and analysts said on Thursday.

They estimated nearly three billion ringgit ($1.2 billion) would return to the banking system over the next two to three weeks, causing short-term interbank rates of up to three-months tenure to fall by 0.10 to 0.25 percentage points.

The funds had been mainly withdrawn by individual depositors in cash ahead of the Chinese Lunar New year and Moslem Eid al-Fitr festivals.

With festival spending over, money would return to banks as deposits, dealers explained.

If you take a very short-term viewone or two weeksthere is room for interest rates to ease slightly, said Andy Tan, economist with MMS International in Singapore.

But, the downside will be limited because we expect the central bank to come in and soak up liquidity (if rates fall sharply). I see a maximum fall of 25 basis points, he said.

Tan said the central bank, Bank Negara, was unlikely to face any monetary management problems and it would continue to maintain its high interest rate policy. Malaysias growing current account deficit and inflation had triggered worries about overheating last year and forced Bank Negara to maintain a tight policy. The three-month interbank rate has risen nearly 200 basis points in the last two years.

Money market dealers in Malaysia also expect the interbank rate to coll off in the near-term. They said the one-month interbank rate, which has been volatile recently, would in two weeks retreat to around 7.15 per cent level from the 7.35/40 range on Thursday.

Traditionally there is a surge in liquidity after the two festivals and rates fall, but I dont think the rates will fall below Bank Negaras intervention level, said a senior dealer with a Malaysian bank in Kuala Lumpur. Bank Negara regularly intervenes in the interbank money market to keep liquidity in check or set interest rates. It last intervened in the market on October 24, 1996.

Dealers said there was also an interest rate arbitrage possibility which could attract funds next week. The head of money dealing at one of Malaysias biggest banks said some short-term rates on ringgit deposits in the overseas swap market were much higher than in the domestic market.

One-month rate in the swaps market is 6.8 per cent against 7.30 level domestically, he said.

In addition, demand for the ringgit from overseas investors putting funds in Malaysias stock and currency markets could add further liquidity to the system.