Soc Gen: PBoC rate cut more about reform than policy easing

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Soc Gen are underwhelmed by the PBoC’s rate cut announced on Sunday evening. In fact, they believe it is “more about reform than easing”.

Alongside the PBoC’s 0.25% cut to benchmark interest rates, the bank also lowered benchmark one-year deposit rates by the same margin. However, in a move that essentially allows banks to pay even higher rates than they could previously, the PBoC increased the maximum deposit ceiling rate from 130% to 150% of the benchmark. This, according to Soc Gen, lays the platform for the bank to completely abolish the deposit ceiling later this year.

“We observed that up until mid-April most of the major banks no longer floated their deposit rates to the ceiling, but a good number of small regional banks continued to do so. However, interbank rates have fallen notably in the past few weeks, which should have significantly reduced the funding pressure at small banks. Therefore, we expect little change in actual deposit rates despite the reduction in benchmark deposit rates. This would be ideal for the PBoC as it aims to completely remove the ceiling to bank deposit rates soon and we think this will be achieved in 2015”.

On the cut to benchmark lending rates Soc Gen believes lower interbank interest rates, rather than the reduction in benchmark lending rates — which will drag on bank profitability, will be required to make any meaningful impact on activity levels within the economy.

Soc Gen don’t appear to have high hopes that the PBoC’s move will deliver any meaningful stimulus to the economy.

In a nutshell, we are neither surprised nor impressed by this interest rate cut. Lowering interbank rates, which has taken place since April, is the most effective easing measure. As for the impact, we just have to be patient in an environment of weak private credit demand and rising credit risk. We had expected the April activity data to improve modestly but the PBoC’s hasty action days before the release seems to suggest otherwise. If economic growth continues to slide, policy easing will have to step up as well.

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