People’s Bank of China Governor Pan Gongsheng said during a press conference on Tuesday that China will cut the amount of the reserve requirement ratio (RRR) by 50 basis points (bps).
Pan added that the Chinese central bank would cut the 7-day repo rate to 1.5% from 1.7% and down payments for second homes will be cut to 15% from 25%.
Key quotes
Must coordinate monetary and fiscal policies.
Must support the steady recovery of prices in the economy.
By year-end, we might cut the RRR rate further.
After the RRR cut, the financial weighted ratio for large banks will be reduced to 8%.
MLF will be lowered by 0.3%.
LPR will be lowered by 0.2 to 0.25%.PBOC has incorporated treasury bonds into its monetary policy toolbox, and carried out buying and selling treasury bonds in secondary market.
But the overall process will be 'gradual'.
Commenting on falling home prices and valuations, Pan said:
It is expected that the average reduction in the interest rate of existing mortgages will be about 0.5 percentage points.
The policy will reduce household interest payments on mortgages for home owners by an average of 150 billion Yuan.
Will guide commercial banks to improve pricing mechanism for mortgage loans.
Will no longer distinguish between down payment for first, second homes and it will be unified at 15%
Down payments for all homes at 15%.
Market reaction
AUD/USD is defending gains near 0.6850 following these comments, awaiting the Reserve Bank of Australia (RBA) policy decision for fresh impetus.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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