People’s Bank of China (PBoC) announced a 0.25% cut for lending and deposit rates over the weekend. The latest interest rate reduction following rate cuts just seven weeks ago highlights the central bank’s easing monetary stance amid a slowing economy, analysts say.
PBoC also announced a 0.5% cut in required reserve rate (RRR) for certain banks whose lending to agricultural sector and small-and-micro enterprises meets requirements. About 40% of banks’ deposits in China are eligible for the 0.5% RRR cut, according to estimates by the investment and research firm CICC.
A-share market experienced a big correction over the last two weeks, partly due to worries over the tightening of liquidity. Shanghai Composite Index recorded an over 18% drop in the past two weeks while ChiNext, a NASDAQ-style board of the Shenzhen Stock Exchange, lost over 25%. The new cuts in interest rate and RRR are likely to ease worries over liquidity, Chinese broker Cinda Securities says in a research note to clients.
The latest 0.25% interest rate cut represents the fourth in China’s recent rounds of rate cuts.
PBoC cut rates by 0.25% in May 2015, 0.25% in March 2015 and 0.4% in November 2014. The one-year lending benchmark rate now stands at 4.85%, while the one-year deposit benchmark rate will decrease to 2%.
The latest RRR cut marks the third in China this year, and the first such in 2015 that applies to designated banks. The central bank announced a 0.5% RRR cut on February 5 and 1% cut on April 20 this year.
Despite the combined 2% RRR cut already implemented in 2015, CICC predicts PBoC will continue and announce another 1.5% reserve ratio cut this year. Given the fact that RRR cut will be more efficient in lowering the nation’s overall funding cost, CICC expects no more interest rate cut in 2015. In addition, with the reduction of risk-free interest rate and the rebound in PPI and property price, China’s economy may start to see moderate recovery, says the investment bank.
