China: PBoC cut the RRR by 25 bps – UOB

Economist at UOB Group Ho Woei Chen, CFA, reviews the latest PBoC meeting.

Key Takeaways

“The People’s Bank of China (PBoC) announced on Fri (15 Apr) that it will lower banks’ reserve requirement ratio (RRR) by 25 bps, effective from 25 Apr.”

“The quantum of RRR cut is much smaller than previous rounds which would typically be 50 to 100 bps. Furthermore, the PBoC left its 1-year medium-term lending facility (MLF) rate unchanged at 2.85% on Fri (15 Apr), against market’s and our expectation of a 10 bps cut to 2.75%.”

“First, this could imply that the PBoC is running into constraint to use the RRR as a monetary policy tool after successive reductions over the years.”

“Second, the overall impression is that the central bank has little appetite for aggressive monetary policy easing. While the PBoC wanted to boost market confidence, it is also aware that the impact of its policy easing may be limited by weak credit demand. As such, policymakers may find it more useful to use measures to address demand side weakness by easing COVID-19 curbs and boost consumption demand.”

“Third, as the RRR is reduced by a smaller than expected quantum and will only take effect from 25 Apr, the immediate impact on lowering banks’ funding cost will be limited. Thus, the 1Y LPR and 5Y LPR are likely to be unchanged at 3.70% and 4.60% respectively at the fixing this month on 20 Apr.”

“We see more pressure for the PBoC to ease its monetary policy further in the upcoming months, likely by direct cuts to the 1Y MLF rate to bring down the LPR and via its relending tool. We maintain our forecast for the benchmark 1Y LPR to fall to 3.55% but see a longer time frame for the easing by the end of 3Q22 instead of 2Q22.”