China: PBOC lowers banks' reserve requirement ratio to shore up growth
February 4, 2015
On 4 February, the People’s Bank of China (PBOC) decided to cut the reserve requirement ratio (RRR) for big banks for the first time since May 2012. Although this decision was widely anticipated, market participants were caught somewhat by surprise by the timing of the decision. The PBOC cut the reserve requirement ratio for big lenders by 50 basis points to 19.5%, effective on 5 February. According to analysts, this move could inject around CNY 600 billion (USD 96.0 billion) into the financial system. Moreover, the Bank decided to lower the requirement for city commercial and rural banks by 50 basis points, while the Agricultural Development Bank of China received an additional RRR cut of 400 basis points.
The PBOC decided to cut the RRR in an attempt to stimulate economic growth and avoid disinflationary pressures. Moreover, recent data suggest that that capital outflows accelerated in Q4, which thereby tightened domestic liquidity conditions, as well as the expected pick up in liquidity ahead of the Chinese New Year, also played a role in the PBOC’s decision.
Analysts believe that monetary authorities may embark on further monetary easing. As Liu Li-Gang, Chief Economist for Greater China at ANZ, comments:
“While we view today’s RRR cut as a positive move, further monetary policy easing by the PBOC is still required to prevent the economy from falling below 7% in Q1 and fend off rapid dis-inflationary pressures. We expect another two 50bps cuts this year, and the deposit rate will be cut by up to 50bps.”