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China: PBoC rates need to come down further - Rabobank

FXStreet (Delhi) – Michael Every, Research Analyst at Rabobank, suggests that in a debt-laden Chinese economy, PBoC rates will need to come down much further ahead rather than rise as it can allow the market to set rates freely once official rates are close to (or below!) zero, as in the US, UK, Europe, and Japan.

Key Quotes

“The PBoC cut rates a further 25bp (as we were expecting) to a new low of 1.50% while also slashing banks’ reserve requirement ratio (RRR) 0.50% to 17.50%. That was the sixth 25bp rate cut in this cycle, though technically we have now seen 200bp of cuts since 2012.”

“What was most notable about the move was that there was very little market reaction. Initially global equities and commodities rallied, but this was reversed within hours. A few months ago, a rate cut was seen a serious policy weapon, and a dual rate and RRR cut was regarded as a “big gun”: worryingly, this now appears to be firing blanks.”

“Of course, that’s no surprise given the level of debt in the economy, but to those who don’t look at that key metric, it is as an unpleasant surprise. Moreover, China has now removed the cap on deposit interest rates, so financial institutions can compete for funding. That technically starts down the road to interest rate liberalisation.”

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