Risk assets and currencies have benefited from China’s surprise announcement that it is reducing key deposit and lending rates for the second time in a month. Although the timing of the announcement (so soon after the last move) was a surprise, the fact that it has reduced rates again is certainly not. In addition, the PBOC declared that banks will be permitted to offer loans at a discount of up to 30% (relative to benchmark rates).
Whilst the economy may well have started to stabilise over recent weeks, after losing momentum progressively through the first half of the year, clearly policy officials still believe that a further easing of financial conditions is warranted. Next week, second-quarter GDP will be released and it is expected to show a further deceleration of growth. According to some estimates, the growth rate of GDP in the last quarter may have slowed to below 7.5% from the 8.1% rate in Q1. In addition, there are further signs that inflationary pressures are moderating – the June CPI may have fallen to just 2.5%, from 3.0% in the previous month. Now that policy-makers feel they have inflation under better control, they are more inclined to step in with more aggressive policy initiatives.
This latest move on rates from Beijing is very welcome. We can expect more in the months ahead, including some reductions in bank reserve requirements. It will help placate some of the underlying caution towards risk that is still infecting the market, and has given high-beta currencies like the Aussie a real lift – AUD reached 1.0330 not long after Beijing’s announcement.