China Monetary Policy

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China: PBOC surprises again, cuts rates to multi-year lows

February 28, 2015

The People’s Bank of China (PBOC) unexpectedly decided to make a symmetric cut to its benchmark lending and deposit rates at its 28 February monetary policy meeting. The measure was effective as of 1 March. The PBOC cut both rates by 25 basis points thus bringing the one-year deposit to 2.50% and the one-year lending rate to 5.35%. This move represented the second cut in four months and the two main rates are now at the lowest levels since 2010.

The PBOC also decided to allow more flexibility in deposit rates. The upper ceiling on the benchmark deposit rate was raised from 120% to 130%. While this move, combined with the rate cut, will likely squeeze bank margins, it is expected to provide more support to the real economy. Analysts also see these decisions as another step toward interest rate liberalization.

The PBOC, which had refrained from adjusting its main monetary policy tools since 2012, has cut both the benchmark rates as well as the reserve requirement ratio in the past four months. That said, analysts believe that further monetary easing is in the pipeline as the economy is failing to gain momentum and deflation is looming on the horizon. As Wang Tao, Chief China Economist at UBS points out:

Although one rate cut is helpful at the margin, it is insufficient to offset the passive tightening of monetary conditions so far, in our view. As highlighted in our earlier report, we think the PBC should cut benchmark lending rates by 100 bps this year to keep real rates from rising, but expect the PBC to only cut 50-75 bps. Therefore, more monetary accommodation is still warranted. The next rate cut could come in Q2 following persistent deflationary pressure and weak activity data. In addition to the rate cut, we also believe the central bank needs to cut RRR and use liquidity operations to help offset the drop in FX related liquidity, and ease loan quota and other lending restrictions.

FocusEconomics Consensus Forecast panelists expect the one-year lending rate and the one-year deposit rate to end the year at 5.27% and 2.43%, respectively. For next year, the panel sees the benchmark lending rate at 5.26% and the benchmark deposit rate at 2.41%.


Author: Ricard Torné, Lead Economist

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China Monetary Policy March 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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