On Saturday night, the People’s Bank of China (PBoC) announced a relaxation of the maximum loan-to-deposit ratio (LDR) requirement by including most financial institutions’ deposits at commercial banks in the denominator, effective on 1 January 2015. Also according to the announcement, these deposits will start to be subject to required reserve ratio (RRR), which, however, will be set at zero to begin with. Societe Generale Research comments:
- This change will be neutral to liquidity conditions, better than market expectations but in line with ours.
- We think that this move will make it easier for banks to extend lending at the current pace, but is unlikely to lead to acceleration in loan growth or notable declines in borrowing costs.
- Since banks will rely increasingly on the interbank market for funding as a result of this change, it is becoming ever more crucial for the central bank to keep liquidity conditions accommodating.
- In other words, cutting policy rates becomes ever more irrelevant, while cutting RRR, although delayed by this change, will still be necessary.
The material has been provided by InstaForex Company – www.instaforex.com