China cuts rates, but more are needed

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By Craig Botham, Emerging Markets economist at Schroders.

In a move that should prove helpful at the margin, the People’s Bank of China (PBoC) at the weekend delivered another cut to the benchmark lending and deposit rates. We expect this aggressive easing trend to accelerate during the rest of 2015.

Both the lending and deposit rates were cut by 25 basis points, taking the lending rate to 5.1% and the deposit rate to 2.25%. At the same time the ceiling for the deposit rate was raised to 1.5 times, from 1.3 times previously; banks are able to offer a slightly higher deposit rate than previously, if they wish.

So far, rate cuts in China have depressed net interest margins at banks, which felt unable to lower deposit rates but were compelled to reduce the rate on existing lending. As a consequence, the rate on new lending, important for refinancing costs, stayed higher as banks attempted to recoup their diminished margins. This time, however, listed banks have been reducing their deposit rates as well as their lending rates, suggesting not only less pressure on net interest margins but also a greater marginal impact on debt costs for corporates and households.

The PBoC’s quarterly report showed that despite the easing measures introduced, effective rates in China remain elevated, and the low level of inflation means real effective rates are higher at present than their 2014 average.

Given the apparent shift to more aggressive easing, we now expect an accelerated pace of monetary easing for the rest of 2015, in effect frontloading the stimulus we had expected for 2016.  One implication might be that April’s data is weaker than expected, certainly the trade and PMI data so far would suggest as much. We think GDP growth is likely to slow further in Q2.


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