The People’s Bank of China (PBOC) has cut interest rates for a sixth time since November 2014 as it tries to stimulate the economy, which has slowed down markedly in 2015. The central bank cut its 1-year lending rate by 0.25% to 4.35% and its 1-year deposit rate by 0.25% to 1.50%. The reserve requirement ratio (RRR) was also cut, for the fourth time this year, by 50 basis points to 17.5% and applicable to most large banks. Additionally, the PBOC announced the liberalization of the deposit rate by removing the ceiling on deposit interest rates.
The reasons cited by the PBOC for the cut in interest rates were the low levels of inflation, persistent downwards pressure facing the economy and to “reduce the social cost of financing”. It also said that the lowering of the reserve requirement ratio was a pre-emptive move to support liquidity in the banking system, particularly for rural and small- and medium-sized enterprises. The central bank noted it will continue to pay close attention to the economic and price situation changes and will need to be flexible in its use of monetary policy tools.
China’s economy slowed to an annual rate of 6.9% in the third quarter, slightly lower than the 7% recorded in the first half of the year and below the official target rate. Both exports and imports have slumped in recent months as Chinese manufacturers suffer from overcapacity. This has had a major impact on global commodity prices such as steel. While the stock market appears to have stabilized after the summer frenzy and the PBOC has reversed its policy to push the yuan lower, it is too early to judge if the current measures will be enough to spur growth. Some analysts see the current fears of a slowing Chinese economy to be overstated while others are concerned that the official figures are underestimating the true extent of the downturn.
Market reaction was mixed after the PBOC’s move. Gold prices soared to just above $1179 and US December oil futures jumped to $45.70 immediately after the announcement. But both fell sharply as the dollar started to rally on expectations that the latest moves by the ECB and PBOC will encourage the Fed for an early rate rise. Gold slumped to $1160, while oil hit a low of $44.21. The aussie also fell on a resurgent dollar, despite hitting a high of 0.7296 right after the China rate cut. It fell to 0.7200 against the greenback before rebounding slightly to 0.7208.