PBoC cuts interest rates by 25bp, at least timing appears influenced by stock market plunge

  • People’s Bank of China (PBoC) on Saturday cut both its one-year benchmark lending rate and its one-year benchmark deposit rate by 25bp to 4.85% and 2.0%, respectively. This was the fourth interest rate cut since November last year. In addition, the reserve requirement ratio (RRR) for commercial banks was cut by 50bp and for large banks the RRR is now 18%. In principle, it was a targeted RRR-cut in the sense that it will only cover banks that meet PBOC’s standards to support the agricultural sector and SMEs. However, most banks are expected to fulfil this requirement.

  • While another interest rate cut by PBoC was widely expected, it was nonetheless a relatively aggressive easing move. First, it is unusual that PBoC cut both its leading interest rates and the RRR on the same day. Second, PBoC has also started to inject liquidity more aggressively into the money market again. PBoC injected substantial liquidity into the money market in connection with its reverse-repo operations on Thursday last week and the interest rate on the reverse-repo operations was cut markedly to 2.7% from 3.35% previously (see chart below).

  • It is hard not to see at least the timing of the interest rate cuts as a response to the sharp decline in the Chinese stock market in the previous days. The main Shanghai stock market on Friday dropped more than 7% and is down close to 20% since its peak in mid-June, albeit still up close to 30% since the beginning of 2015. The bull market and the potential bubble in the Chinese stock market has been a major concern for PBoC. Hence, the interest rate cut should mainly be seen as an attempt to secure that a correction in the stock market does not get out of hand, rather than an attempt to underpin a continued bull market.

  • We have not changed our macro-economic view on China in the wake of the recent sharp decline in the Chinese stock market. In our view, the impact on growth from the plunge in stock prices will be modest, as it was in connection with the Chinese stock market collapse in 2007/2008. What happens in the housing market will be much more important and so far there are tentative signs that the housing market has started to recover in the wake of PBoC’s easing. New home sales have recovered markedly in recent months and house prices also started to increase again in May. The manufacturing PMIs have also started to improve. Hence, data still support a moderate recovery in growth in H2.

  • For that reason we do not expect to see aggressive easing from PBoC in the coming months. The RRR will probably be cut by at least another 50bp but we do not expect the leading interest rates to be cut further. That said, the impact of Greece on the global economy is a major uncertainty in the short run.

  • We also continue to expect USD/CNY to trade broadly unchanged in the coming months as China does not want to rock the boat ahead of the IMF’s decision this autumn on possible inclusion of the CNY in the SDR.

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD recovers toward 1.0500 after mixed US PMI data

EUR/USD recovers toward 1.0500 after mixed US PMI data

EUR/USD rebounds toward 1.0500 in the American session on Friday after the data from the US showed that the business activity in the private sector expanded at a softer pace than anticipated in early February. The pair remains on track to end the week with little changed.

EUR/USD News
GBP/USD rises above 1.2650, looks to post weekly gains

GBP/USD rises above 1.2650, looks to post weekly gains

GBP/USD regains its traction and trades above 1.2650 in the second half of the day on Friday. The data from the US showed that the S&P Global Services PMI dropped into the contraction territory below 50 in February, causing the US Dollar to lose strength and helping the pair edge higher.

GBP/USD News
Gold holds above $2,930 as US yields edge lower

Gold holds above $2,930 as US yields edge lower

Gold holds above $2,930 after correcting from the record-high it set above $2,950 on Thursday. Following the mixed PMI data from the US, the benchmark 10-year US Treasury bond yield stays in negative territory below 4.5% and allows XAU/USD to hold its ground.

Gold News
Crypto exchange Bybit hacked for $1.4 billion worth of ETH

Crypto exchange Bybit hacked for $1.4 billion worth of ETH

Following a security breach first spotted by crypto investigator ZachXBT, crypto exchange Bybit announced that it suffered a hack where an attacker compromised one of its ETH wallets.

Read more
Money market outlook 2025: Trends and dynamics in the Eurozone, US, and UK

Money market outlook 2025: Trends and dynamics in the Eurozone, US, and UK

We delve into the world of money market funds. Distinct dynamics are at play in the US, eurozone, and UK. In the US, repo rates are more attractive, and bills are expected to appreciate. It's also worth noting that the Fed might cut rates more than anticipated, similar to the UK. In the eurozone, unsecured rates remain elevated.

Read more
The Best brokers to trade EUR/USD

The Best brokers to trade EUR/USD

SPONSORED Discover the top brokers for trading EUR/USD in 2025. Our list features brokers with competitive spreads, fast execution, and powerful platforms. Whether you're a beginner or an expert, find the right partner to navigate the dynamic Forex market.

Read More

Majors

Cryptocurrencies

Signatures

Best Brokers of 2025