Bank Negara Malaysia's (BNM) surprise cut in reserve requirements may not be enough to fix the country's funding constraints, with capital outflows and slow growth in bank deposits likely to force more easing measures, economists said.

Yesterday, BNM cut the statutory reserve requirement (SRR) ratio to 3.5 percent from four percent, effective Feb 1, while it kept its benchmark overnight policy rate (OPR) unchanged at 3.25 percent.

The ringgit touched a near three-week high today, following the BNM move, while banking stocks also got a boost.

BNM also said it has injected RM40 billion into the market since early 2015 to boost liquidity.

Economists said the SRR cut could add around RM6 billion to the domestic market.

But the central bank will need to do more, they said, and as it is unlikely to trim the overnight rate for fear of triggering more outflows, that will mean further SRR cuts.

"Malaysia's banking system is facing very tight liquidity and slow deposit growth," said ANZ economist Weiwen Ng. "Things are not going to improve in terms of liquidity. Hence, it's better to act now rather than later."

BNM's ratio cut "is a recognition that there are indeed downside risks to growth. And that these risks are getting greater," he said.

The central bank did not respond to requests for comment.

Malaysia saw huge capital outflows last year as the ringgit was rocked by slumping commodity prices and a political scandal involving billions of ringgit mysteriously deposited in Prime Minister Najib Abdul Razak personal bank account.

With the ringgit losing about a fourth of its value since the beginning of 2015, exporters preferred to hold foreign currencies. Banks' loans-to-deposits ratio - a measure of their liquidity - rose to 91 percent at the end of November, near a record high, according to a BNM report.

The last time BNM cut the reserve ratio was during the 2008-2009 financial crisis, when the SRR was lowered from four percent to one percent in three months.

"There is room for further SRR cuts. However, BNM will only do so if liquidity conditions worsen," said Teh Chi-cheun, chief executive of Pacific Mutual Fund Bhd.

Najib is expected to cut expenditure when he revises the Budget 2016 on Jan 28 to reflect sliding oil prices. Foreign reserves hit a six-year low in September, though they have climbed modestly since then.

- Reuters