Quick Data Update: Benchmark rates cut again. These rate cuts are different.

  • 1 year benchmark deposit rates cut 0.25%, to 2.00%
  • 1 year benchmark lending rates cut 0.25%, to 4.85%

The PBOC cut key benchmark rates over the weekend by 0.25%.  But, it is what they did not do that was important.  The last few deposit rate cuts in this cycle included an increase in the allowable range around the benchmark deposit rate.  The mandated ceiling on deposit rates remained unchanged with each cut.  For that reason, the last few rate cuts were as much about laying the groundwork for deposit rate liberalization as they were about easing.

The rate cuts this weekend did not include an increase in the allowable range.  So, the cuts were all about monetary easing this time.

Whether the stock market plunge was a consideration for the rate cuts is debatable. The cuts were made in tandem with targeted reserve changes to agricultural and small business lenders, which would imply that these measures were planned well ahead of the market plunge.  But, the cut will have a positive effect on market sentiment regardless of whether that was the intention.

Real rates are still relatively high on a historic basis, implying that monetary policy remains too restrictive.  Inflation, money supply, and growth are outside of targets, and the year is almost halfway done. The cuts were most likely a modest easing measure to nudge growth higher and indicators closer to targets and roll-back restrictive policies (see chart on the right).   

A broad RRR in my view is still the most potent easing measure in the PBOC toolkit, but also the most dangerous for potentially fueling investment excesses. This rate cut is a possible sign that more potent RRR cuts are not imminent, and easing measures may be taken in more modest steps.

All in all, the cuts are good for sentiment and will provide modest help to sluggish investment growth, one of the main impediments to growth prospects.  The cuts push back broad RRR easing prospects, but should improve Q4 prospects even more than I previously expected.