PBoC easing not a sign of greater economic concerns, Capital Economics says
The People’s Bank of China lowered its key interest rates on Friday, as might have been expected, and lifted its last limitations on bank deposit rates, an important milestone in the process of liberalising interest rates, a leading research house said.
Investors would be wrong to think that Beijing was reacting to economic weakness.
“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy,” Capital Economics explained in a research note sent to clients.
Friday’s decision was again taken about two months after the last reduction in the PBoC’s main policy rates.
The 12-month lending rate was lowered by 25 basis points to 4.35% and the equivalent deposit rate by the same amount to 1.5%.
Reserve requirement ratios for the country’s major lenders were also lowered, by 50 basis points to 17.5%.
"These moves come after clear signs of weakness in the economy in recent months. Amid continued capital outflow and falling CPI inflation, we believe these cuts may be necessary to prevent a tightening of financial conditions.
"The abolishment of the deposit rate ceiling is a major step in interest rate liberalization. This move is also important as it sends a clear message that reform is not being halted despite economic and market turbulence in recent months, in our view," Goldman Sachs chipped in.
The elimination of the last caps on bank deposits marks the full liberalisation of interest rates which has been carried out over the past two years, Mark Williams, chief Asia economist at Capital Economics said.
Although authorities said they would continue to “guide” rates by offering cheaper financing to banks that followed its instructions, “it is an important moment in financial sector reform that has macro implications”, he added.
Both the main lending rate and the RRR would be cut again once before year-end and then again towards the start of 2016, Williams said.
"Policy easing so far – both monetary and fiscal – does seem to be helping [...] with more stimulus in the pipeline, the economy should look stronger soon."