The latest rate cuts by the People's Bank of China (PBOC) will add to system liquidity and further drive down borrowing costs, mitigating the ongoing growth slowdown, Moody's Investors Service said Thursday.
"We estimate the reserve requirement ratio(RRR) reduction will free up approximately 600-700 billion yuan (93.7-109.4 billion U.S. dollars) of mandatory reserves placed with the PBOC," said Frank Wu, a Moody's analyst.
"On balance, we expect the latest policy shift will be positive for Chinese banks from a liquidity perspective," said Wu. "This will alleviate upward pressure on interbank borrowing rates and ease interbank rate volatility."
On Wednesday, the PBOC reduced both the country's benchmark lending and deposit rates by 25 basis points. Effective on September 6 this year, the PBOC will also lower the RRR by 50 basis points for all banks, with an additional 50 basis point reduction for rural financial institutions.
This is the second round of rate cuts in two months and the fifth since November 2014.
"Continued monetary easing could bring some further downward pressure on exchange rates this year, although a sharp depreciation is unlikely," according to the Moody's.
Moody's has revised its factor outlook on funding and liquidity for the banking system to stable from improving, on increased concerns over capital outflows, following a more flexible exchange rate regime.
