News Analysis: Interest rate cut by PBoC aims at withstanding disinflation risk: British experts

Experts here in Britain said China's benchmark interest rate cut and the increase of upper limit of the floating band of deposit rates would have positive effects to the Chinese economy, especially for supporting the private sector.

China's central bank, the People's Bank of China (PBoC), Sunday announced the benchmark deposit and loan interest rates cut by 25 basis points. It also decided to lift up the upper bound of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times.

POLICY TRADEOFF

Yao Shujie, Economist and Professor at University of Nottingham, told Xinhua that the PBoC faces kind of policy tradeoff between countering disinflation risk and the downward pressure of Renminbi, or Chinese yuan, exchange rate.

He said:" Last month, the central bank reduced the bank reserve/deposit ratio by one percentage point, but did not reduce the interest rate at the same time. The reason was not to affect the stability of the RMB exchange rate. Now that the RMB exchange rate has been stable and the CPI is historically low in recent years, the risk in destabilizing the RMB exchange rate is low. Hence, the impact of reducing the interest rate by a quarter percentage point on RMB is expected to be small."

Yao noted that the policy adjustment timing is important as the Chinese government does not wish GDP growth in the second quarter of 2015 to be any lower than seven percent. Meanwhile, the scale of reduction is moderate because the central bank is still cautious not to upset the exchange market.

Mao Lei, Assistant Professor at Warwick Business School, told Xinhua that he thinks the timing is earlier than his expectation, but there is nothing special about the rate cut itself, as the Chinese economy continues to slow down and manufacturing sector is still weak.

Mao highlighted that:" What is more interesting is that now the banks will have more space to determine the loan rate. With the upper bound of the loan rate increases, it should be viewed as an effort to make financing easier for the private sector, since the market efficient rate for small and risky firms in private sector should be high."

BENEFITS

Experts here tone positively on the expected effects of the new policy adjustments, and the Chinese central bank still possesses ammunition in its tool box.

Yao said the rate cut as well as the loan rate upper bound lifting would be good for domestic investment, consumption and hence economic growth. The effect of reduced interest rate will also help the housing market recovery to some extent.

He forecast that the other policy tool of the PBoC is a further reduction of the bank reserve-deposit ratio later in the year. And other policy instruments might include the acceleration of local investments, particularly for the high-speed train railway system.

HSBC's Global Research Team said in a report: "The rate cut should help lower funding costs for the real economy. In light of the recent economic slowdown and rising disinflationary pressures, further policy easing including reserve ratio and rate cuts will still be warranted in the coming months."

Mao said in the long run, he expects the private sector will benefit from the increase of rate roof, "PBoC obviously can decrease deposit reserve ratio, which is likely to happen this year."

Mao reckons that the PBoC should refrain from using a quantitative easing (QE)-like tool, even though the rate and deposit reserve ratio cuts are not likely to stimulate the GDP number.

"We should not expect any stimulation effect of monetary policy anymore. We should really pay attention to efficiency and transparency of the banking sector, which is not the aim of monetary policy," he added. Endit