China’s authorities reverted to conventional rate cuts to prevent a sharp drop in growth

Resumen

The People’s Bank of China (PBoC) cut the benchmark interest rates last Friday, the first time since July 2012 and effective from November 22th. The cut is asymmetric in the sense that the one-year benchmark lending rate was lowered by 40 bps to 5.6% while the one-year deposit benchmark rate was trimmed to 2.75% from 3.0%. Meanwhile, the PBoC announced that the permissible floating range of deposit rates is expanded to 20% (versus 10% previously) above the benchmark deposit rates, which also constitutes an additional step in interest rate liberalization and reaffirms the authorities’ resolution to push for structural reforms. As a result, the effective deposit rates (the highest rates that banks can offer to their depositors) will remain at 3.3% unchanged. (Figure 1) The interest rate cut is a welcome development although its effectiveness might be limited by tight liquidity condition. We therefore maintain our growth projection of 7.3% in 2014 and 7.0% in 2015.

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