China Monetary Policy


PBOC cuts both benchmark rates and the RRR to foster growth

On 27 June, the People’s Bank of China (PBOC) decided to cut both its benchmark lending and deposit rates for the fourth time since November 2014. The PBOC reduced both rates by 25 basis points, thus bringing the one-year deposit rate to 2.00% and the one-year lending rate to 4.85%. With this move, the one-year lending rate is at the lowest level on record, while the one-year deposit rate is edging closer to all-time lows. The PBOC also decided to lower the reserve requirement ratio (RRR) by 50 basis points for lenders that meet certain levels of loans to agricultural and small medium-sized enterprises. As a result, the RRR for big lenders is now at 18.00%. Moreover, the Bank cut the reserve requirement ratio for finance companies by 300 basis points. All measures were effective as of 28 June.

The unusual simultaneous cut to both of the benchmark rates and the RRR suggest that Chinese authorities are strongly committed to avoiding a sharp slowdown of the economy and that they want to act decisively to ease financing costs. According to analysts, these measures are also intended to tame the sharp decline in the Chinese stock markets. The Shanghai Composite Index has lost around 20% of its value since mid-June.

Despite the bold monetary easing that has been unfolding since the end of 2014, analysts foresee that the PBOC will take further action in the coming months. In this regard, Changchun Hua, China Economist at Nomura International, states:

Growth momentum has been stabilising but remains weak, which is consistent with our previous outlook, and we see little need to revise our baseline policy forecast of a total of four RRR and four benchmark interest rate cuts over 2015. Following this most recent RRR and policy rate cut, we expect one more 50bp RRR cut and one more 25bp benchmark rate cut over the remainder of this year. Policymakers might need some time to assess the effect of ongoing easing, so we believe the next move could happen in August.

FocusEconomics Consensus Forecast panelists expect the one-year lending rate and the one-year deposit rate to end the year at 4.87% and 2.03%, respectively. For next year, the panel sees the benchmark lending rate at 4.79% and the benchmark deposit rate at 1.93%.

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China Monetary Policy Chart

China Monetary Policy June 2015 0

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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