China Monetary Policy


PBOC acts again to tame disinflationary pressures and prop up growth

On 10 May, the People’s Bank of China (PBOC) decided to cut both its benchmark lending and deposit rate for the third time in six months. The measure, effective as of 11 May, was in line with market expectations and followed April’s cut in the reserve requirement ratio. The PBOC cut both rates by 25 basis points, thus bringing the one-year deposit to 2.25% and the one-year lending rate to 5.10%. The one-year lending rate is now at the lowest level on record.

The PBOC also decided to allow more flexibility in deposit rates. The upper ceiling on the benchmark deposit rate was raised from 130% to 150%. While this move, combined with the rate cut, will likely squeeze bank margins, it is expected to provide broader support to the real economy and also counter rising disinflationary pressures. Further monetary policy easing could be in the pipeline as real interest rates and funding costs are still high and latest indicators paint a rather weak picture of the economy.

Analysts see these decisions as another step toward interest rate liberalization. In this regard, Changchun Hua, China Economist at Nomura International, states:

We see a high likelihood of the PBoC removing the cap for the deposit rate during one of the next two interest rate cuts. Thereafter, the PBoC will likely use the short-term interbank rate (possibly the 7-day repo rate) as its major policy rate, while also maintaining medium- and long-term lending facilities to ensure its policy intention can pass through to the yield curve. Nevertheless, the benchmark rates are still useful, as these will continue to form the reference rates for loans and deposits.

FocusEconomics Consensus Forecast panelists expect the one-year lending rate and the one-year deposit rate to end the year at 5.08% and 2.22%, respectively. For next year, the panel sees the benchmark lending rate at 5.01% and the benchmark deposit rate at 2.14%.

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China Monetary Policy Chart

China Monetary Policy May 2015

Note: One-year lending rate, one-year deposit rate and reserve requirement ratio (RRR) for large banks in %.
Source: People’s Bank of China (PBOC).

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