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Friday’s rates cut was "reasonable and fully expected" – PBOC explains

FXStreet (Mumbai) - Explaining the double booster shot announced unexpectedly on Friday, the PBOC wrote on its website on Monday, that such moves were "reasonable and fully expected" and differed in a big way from the easing programs rolled out by the US and Europe.

The PBOC cut both the one-year lending rate and the deposit rate by 25bps on Friday, marking the sixth rate cut since last November.

Key Quotes:

"The cooling inflation in September means that an appropriate reduction in the nominal interest rate is needed to allow real interest rate to return to a reasonable level, allow social financing costs to fall further and amplify the financial support for the economy."

"In the past few months, the total outstanding funds for foreign exchange have seen a certain level of decline. Even though the foreign exchange market has been relatively stable, uncertainties remain ... Hence the reduction in banks' reserve requirement will add more liquidity to the banking system."

The PBOC noted that China did not face the restriction of "zero interest rates" as faced by, the European Central Bank (ECB), because its nominal interest rates remained above zero, while its deposit reserve ratio was also still relatively high.

"The interest rate market is a core reform in the country's financial sector. The removal of a ceiling on deposit rates for commercial banks and rural cooperatives, signify a crucial step forward in terms of reforms and indicate that the interest rate market has entered a new phase."

"This fully represents the country's confidence and determination in pushing through reforms."

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