Workers are busy at a manufacture base of Dongbei Special Steel Group Co., Ltd. in Dalian, northeast China's Liaoning Province, Oct. 13, 2015. (Photo: Xinhua/Liu Debin)
China's central bank on Friday cut interest rates and lowered the reserve requirement ratio (RRR) to promote growth and interest rate liberalization.
The People's Bank of China (PBOC) cut its benchmark one-year lending and deposit rates by 25 basis points each to 4.35 percent and 1.5 percent, from October 24. The bank also cut the RRR for all financial institutions by 50 basis points.
This is the fifth RRR reduction and the sixth round of interest cuts in the last year.
LIQUIDITY INJECTION
Any rate cut's direct impact on growth tends to be limited, but it reduces the interest rate burden for corporates and local governments and reduces financial risk, said a J.P. Morgan report sent to Xinhua.
"The monetary easing is supplemented by additional fiscal policy adjustment to mitigate the funding constraint faced by local governments. Local government debt swap program was expanded to 3.2 trillion yuan in 2015, and policy banks issued 300 billion yuan special financial bond to support infrastructure investment," according to J.P. Morgan
"As the real economy faces tough challenges, the cuts in interest rates and RRR are building a sound monetary environment for stable growth," said Zeng Gang, researcher at the Chinese Academy of Social Sciences.
The move is meaningful for enterprises as they will reduce financing costs and improve operating conditions, Zeng said.
Wang Tao, a UBS economist, expects the PBOC to cut rates one more time this year, and again in early 2016 to bring the one-year deposit rate to 1 percent and the lending rate to 3.85 percent.
"This would push the real deposit rate into negative territory, as often happened in the past, which could encourage consumption, support asset prices and anchor inflation expectations," said Wang.
INTEREST RATE LIBERALIZATION
As a step towards full interest rate liberalization, the central bank also announced on Friday removal of the 50 percent upper-bound for deposit rates, in principle leaving banks free to set their own deposit rates.
