Central bank rate cuts offset pressure on economic growth

An employee counts renminbi (yuan) banknotes at a bank in Lianyungang city, East China's Jiangsu province, June 4, 2014.[Photo/IC]

The People's Bank of China lowered the benchmark interest rates for both one-year loans and deposits by 0.25 percent from Monday, and raised the upper limit of the floating band of deposit interest rates. This is the third time the central bank has cut interest rates in the last six months. Comments:

China has to lower the actual interest rate by further cutting the nominal interest rate to maintain growth. However, this round of interest rate cuts should not be interpreted as a Chinese version of quantitative easing.

Ma Jun, chief economist of the research bureau of the People's Bank of China, May 10

The impact of the benchmark interest rate cut on credit growth will be positive but modest. We expect bank lending to remain constrained by the relatively weak demand for credit. Meanwhile, overall total social financing growth is coming down because of policy efforts to contain shadow banking and financial risks.

We expect the cut to offset some of the downward pressures on growth. We maintain our 2015 GDP growth forecast at 7.2 percent, expecting a gradual pickup in growth during the rest of the year on the back of the policy measures taken so far and some improvement in global demand.

In combination with the rate cut, the PBOC also decided to expand the deposit rate ceiling from the current 130 percent of the benchmark deposit rate to 150 percent. This marks a further step towards interest rate liberalization, following the implementation of the deposit insurance system earlier this month. However, this is only one step toward an interest rate based monetary policy framework. And, given the downward pressures on growth, we do not think there is any appetite at the moment among policymakers to let interest rates take over from quantitative constraints as the key constraint on monetary conditions.

Louis Kuijs and Tiffany Qiu, economists with The Royal Bank of Scotland, May 11

The market did not echo the central bank's move as expected. The latter has now lowered interest rates three times, but the interbank lending rates, an essential index of the banking sector, remains floating from 4.5 to 4.77 percent. That means the adjustment of interest rates in the market is only about half of the nominal interest rate. The authorities also need to advance reforms, including financial, tax, and household registrations, to maintain steady growth.

Beijing News, May 11