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China begins 2015-long easing cycle - Deutsche Bank

FXStreet (Bali) - According to Deutsche Bank Emerging Markets Research Team, last Friday's rate cut by China marks the beginning of an easing cycle, expected to last for the full year of 2015.

Key Quotes

"As a surprise to us and the market, the PBOC announced it was cutting benchmark deposit and lending rates by 25 and 40bp respectively, and lifting the ceiling on deposit rates to 1.2x of the benchmark deposit interest rate, effective from 22 Nov 2014. The rationale to cut now is likely the cumulative fiscal pressure at the local government level that has built up over this year."

"The policy stance has clearly changed from marginally loose toward broad based easing, marking the beginning of a policy easing cycle."

"We expect this cycle to last for the full year of 2015, with two additional cuts in Q2 and A3 respectively, accompanied by two cuts in the reserve requirement ratio totaling 100bp (in Q1 and Q2)."

"We maintain our GDP growth forecast of 7.3% for 2014 and 7.0% for 2015. The rate cut will help to boost sentiment and bring down financing costs in the bond market, but the asymmetric nature of the rate cut makes us doubt the economic impact on the real economy through the banking sector."

"We believe that the downside risks for growth in H1 2015 are reduced by the rate cut, but we do not think this changes the downward trend in growth. The main implications of this move on the fx market are the waning of using RMB appreciation as a monetary tool and the flattening of the CNH forward curve."

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