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China Cuts Interest Rates, Takes Number Of Central Banks Easing In 2015 To 21

And then there were 21.

Hours ago on Saturday, the country whose currency is largely pegged to the dollar which itself is now anticipating a rate hike in the coming months, surprised the world by confirming its economic slowdown yet again following a recent rate cut just this past November when it lowered its benchmark rate by 40 bps, after it again cut benchmark lending and deposit rates by 25 bps starting on March 1. Specifically, the PBOC will lower the one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.

From the PBOC announcement:

People's Bank of China decided to cut financial institutions RMB benchmark lending and deposit interest rates since March 1, 2015. The one-year benchmark lending rate by 0.25 percentage point to 5.35%; year benchmark deposit rate by 0.25 percentage points to 2.5%, while the combination of market-oriented reforms to promote the interest rate, the upper limit of the floating range of interest rates on deposits of financial institutions by the deposit base 1.2 times to 1.3 times the interest rate adjustment; adjusted lending rates and individual housing provident fund deposit and other deposit and lending rates.

As the WSJ notes, "the latest move took place just as China’s legislature, the National People’s Congress, prepared to gather Thursday for its annual meeting. The gathering is usually when China unveils its economic growth target for the year. Last year’s growth of 7.4% came in just below the 2014 target of about 7.5%. It was the lowest growth rate in nearly a quarter century."

However, just so the rate cut is not seen as being, well, a rate cut and an easing shift to China's monetary policy especially considering that the November rate cut did absolutely nothing to boost China's all important housing market, the PBOC was quick to note that the second rate cut in 4 months is "to keep real interest rates at level to adapt to economic growth, prices, employment trends, and does not represent a sound monetary policy changes. China's economic development has entered a new normal, and development conditions and development environments are changing, and its core is to change the way of economic development and economic structure."

In other words, when is a rate cut not a rate cut? When it's in China. The PBOC also provided the following stock announcement explaining what happens next:

Next, we will continue to follow the CPC Central Committee and the State Council, the strategic plan, adhere to the general tone of the work while maintaining stability and macroeconomic policy should be steady, micro policies to live the general idea, more actively adapt to the economic development of the new normal, the transfer and adjustment structure in a more important position, maintain the continuity and stability of policy and continue to implement a prudent monetary policy, pay more attention to an appropriate degree, comprehensive use of various monetary policy tools, timely and appropriate fine-tuning for the adjustment of economic structure and the transformation and upgrading Moderate to create a neutral monetary and financial environment, and promote economic science and sustainable development. At the same time, more focus on innovation, blending in regulatory reform among the tight monetary policy combined with the deepening of reform, timely for businesses and individuals through the introduction of certificates of deposit, etc., continue to expand the financial institution independent pricing space, orderly interest rate reform and further improve the rate-control system, improve the interest rate transmission mechanism and constantly enhance the ability of the central bank interest rate regulation and macro-control effectiveness.

Said otherwise, a whole lot of reform promises. Kinda like Greece. Of course, what is not said is that as long as the Fed keeps threatening to and eventually actually hiking rates, not to mention the global economic contraction persists, China will have no choice but to engage in non-monetary, non-policy rate cuts for the indefinite future.

Here is Goldman's recap of what China did:

The People's Bank of China (PBOC) announced that benchmark lending and deposit rates will both be cut by 25 bps, effective from March 1. In addition, the deposit rate ceiling will be raised from 1.2 times to 1.3 times the benchmark interest rates, which effectively lowers the maximum deposit rate by 5 bp from 3.3% pa to 3.25% pa.

 

Economic growth is widely viewed as weak in early 2015, despite modestly better HSBC flash PMI data for February. The official PMI data to be released tomorrow (which should be known to senior government officials at this point and may well have remained below 50) might have been one factor behind the decision to cut now. The central bank also has a tendency not to take major policy actions during the CPPCC and NPC, which will start on March 3 and close on March 15. Waiting until after those events would have then implied more than two full weeks of delay.

 

The decision to cut benchmark interest rates again has been widely expected by the market (including us). There was also some speculation that the deposit rate ceiling would be increased. While the raise in the ceiling did come about, we believe a larger cut to the benchmark deposit rate arguably would have been more desirable as it could help lower funding costs more broadly in the economy. The increase in deposit rate ceiling is also a small further step towards interest rate liberalization. The cut to the benchmark lending rate is also smaller than the last cut in November (40 bps). This may make some observers view the move as cautious.

 

We expect further policy loosening in the coming months. The next move is likely to be a RRR cut, likely in 2Q, but a cut towards the end of 1Q cannot be ruled out (RRR cut is also a tool of liquidity management). Further benchmark interest rate cuts are also possible. The government is also loosening other policies such as allowing the exchange rate to depreciate modestly against the USD and stepping up infrastructure investments. These measures will likely provide some support for short-term growth, though the cautious nature of the measures so far may raise some questions in terms of whether the economy will experience a rebound as significant as the one seen in Q2 2014.

In conclusion, expect markets to soar even more on Monday while China continues to stealthily devalue the Renminbi in order to fight a housing market collapse that is now worse than what the US experienced after Lehman failed.

* * *

And for all those asking, here is the revised list of now 21 countries who have cut interest rates in just the first 2 months of 2015:

For those asking, here is the full, updated list of 20 central banks easing so far in 2015 courtesy of Reuters:

1. Jan. 1 UZBEKISTAN

Uzbekistan's central bank cuts its refinancing rate to 9 percent from 10 percent.

2. Jan. 7/Feb. 4 ROMANIA

Romania's central bank cuts its key interest rate by a total of 50 basis points, taking it to a new record low of 2.25 percent. Most analysts polled by Reuters had expected the latest cut.

3. Jan. 15 SWITZERLAND

The Swiss National Bank stuns markets by scrapping the franc's three-year-old exchange rate cap to the euro, leading to an unprecedented surge in the currency. This de facto tightening, however, is in part offset by a cut in the interest rate on certain sight deposit account balances by 0.5 percentage points to -0.75 percent.

4. Jan. 15 INDIA

The Reserve Bank of India surprises markets with a 25 basis point cut in rates to 7.75 percent and signals it could lower them further, amid signs of cooling inflation and growth struggling to recover from its weakest levels since the 1980s.

5. Jan. 15 EGYPT

Egypt's central bank makes a surprise 50 basis point cut in its main interest rates, reducing the overnight deposit and lending rates to 8.75 and 9.75 percent, respectively.

6. Jan. 16 PERU

Peru's central bank surprises the market with a cut in its benchmark interest rate to 3.25 percent from 3.5 percent after the country posts its worst monthly economic expansion since 2009.

7. Jan. 20 TURKEY

Turkey's central bank lowers its main interest rate, but draws heavy criticism from government ministers who say the 50 basis point cut, five months before a parliamentary election, is not enough to support growth.

8. Jan. 21 CANADA

The Bank of Canada shocks markets by cutting interest rates to 0.75 percent from 1 percent, where it had been since September 2010, ending the longest period of unchanged rates in Canada since 1950.

9. Jan. 22 EUROPEAN CENTRAL BANK

The ECB launches a government bond-buying programme which will pump over a trillion euros into a sagging economy starting in March and running through to September next year, and perhaps beyond.

10. Jan. 24 PAKISTAN

Pakistan's central bank cuts its key discount rate to 8.5 percent from 9.5 percent, citing lower inflationary pressure due to falling global oil prices. Central Bank Governor Ashraf Wathra says the new rate will be in place for two months, until the next central bank meeting to discuss further policy.

11. Jan. 28 SINGAPORE

The Monetary Authority of Singapore unexpectedly eases policy, saying in an unscheduled policy statement that it will reduce the slope of its policy band for the Singapore dollar because the inflation outlook has "shifted significantly" since its last review in October 2014.

12. Jan. 28 ALBANIA
Albania's central bank cuts its benchmark interest rate to a record low 2 percent. This follows three rate cuts last year, the most recent in November.

13. Jan. 30 RUSSIA
Russia's central bank unexpectedly cuts its one-week minimum auction repo rate by two percentage points to 15 percent, a little over a month after raising it by 6.5 points to 17 percent, as fears of recession mount following the fall in global oil prices and Western sanctions over the Ukraine crisis.

14. Feb. 3 AUSTRALIA
The Reserve Bank of Australia cuts its cash rate to an all-time low of 2.25 percent, seeking to spur a sluggish economy while keeping downward pressure on the local dollar.

15. Feb. 4 CHINA
China's central bank makes a system-wide cut to bank reserve requirements -- its first in more than two years -- to unleash a flood of liquidity to fight off economic slowdown and looming deflation.

16. Jan. 19/22/29/Feb. 5 DENMARK
The Danish central bank cuts interest rates a remarkable four times in less than three weeks, and intervenes regularly in the currency market to keep the crown within the narrow range of its peg to the euro.

17. Feb. 13 SWEDEN
Sweden's central bank cut its key repo rate to -0.1 percent from zero where it had been since October, and said it would buy 10 billion Swedish crowns worth of bonds

18. February 17, INDONESIA
Indonesia’s central bank unexpectedly cut its main interest rate for the first time in three years

19. February 18, BOTSWANA
The Bank of Botswana reduced its benchmark interest rate for the first time in more than a year to help support the economy as inflation pressures ease.
The rate was cut by 1 percentage point to 6.5 percent, the first adjustment since Oct. 2013, the central bank said in an e-mailed statement on Wednesday.

20. February 23, ISRAEL

The Bank of Israel reduced its interest rate by 0.15 percentage points, to 0.10 percent in order to stimulate a return of the inflation rate to within the price stability target of 1–3 percent a year over the next twelve months, and to support growth while maintaining financial stability.

21. February 28, CHINA

The People's Bank of China cut its interest rate by 25 bps, when it lowered its one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.