China: PBOC surprisingly cuts rates to spur growth
November 21, 2014
At its monetary policy meeting held on 21 November, the People’s Bank of China unexpectedly decided to make an asymmetric cut in its benchmark lending and deposit rates, effective from 22 November. The one-year deposit rate was lowered by 25 basis points to 2.75%, while the one-year lending rate was cut by 40 basis points to 5.60%. The PBOC had refrained from adjusting its main policy rates since July 2012 and they are now at a four-year low. The Bank also reduced the different types of lending and deposit rates available.
The PBOC also decided to allow more flexibility in deposit rates. The upper ceiling on the deposit rate was raised from 110% of the benchmark rate to 120%. While this move, combined with the asymmetric cut, will likely squeeze bank margins, it is expected to provide more support to the real economy and accelerate the interest rate liberalization reform.
In the past few months, Chinese authorities had used supplementary lending facilitates, selective reserve requirement cuts and targeted fiscal stimulus to shore up the economy. However, the recent cooling of the economy and the fact that the use of unconventional tools has been proven ineffective in jolting economic activity have forced the Central Bank to adopt a more “accommodative” monetary policy stance, thus reflecting that authorities are becoming more concerned about the real state of the economy.
In another surprising move, the PBOC lowered its 14-day repurchase agreement for the fourth time this year on 25 November. The repo rate was cut by 20 basis points to 3.2%.