China’s central bank continues monetary easing and liberalisation of interest rates

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/35

​On Tuesday (Aug. 25), the People’s Bank of China announced a rate cut of 25 basis points. The reference one-year lending rate now stands at 4.6 %, while the corresponding deposit rate is 1.75 %. The PBoC simultaneously eliminated the interest rate ceiling on time deposits over a year. The interest rate commercial banks can offer on deposits with shorter maturities is still limited to 150 % of the reference rate. This means that interest rate liberalisation in China is very near to completion.

The PBoC also told that it will lower its reserve requirements from September 6. The reserve requirement ratio for all banks will go down by 0.5 percentage points. The impacts were hard to assess last time the reserve requirement was lowered as it only applied to banks meeting certain criteria. Now the PBoC again targeted some banks for reserve requirement cuts greater than 0.5 percentage point.

China has relaxed monetary policy already six times this year. The PBoC said its latest move was needed to keep real interest rates moderate and inject liquidity in money markets. Tighter liquidity conditions were partly due to the central bank yuan purchases to stabilise the exchange rate. An interest rate cut may create pressure to yuan depreciation and increasing capital outflows.

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