Bank cut signals policy easing

PUBLISHED : Monday, 20 February, 2012, 12:00am
UPDATED : Monday, 20 February, 2012, 12:00am

The mainland cut the required reserve ratio for banks by 50 basis points at the weekend, releasing about 370 billion yuan (HK$455 billion) to 400 billion yuan in an effort to boost liquidity as growth in the world's second-largest economy slows for the fifth successive quarter.

This is the second round of cuts, following one in November, since inflation peaked in July last year.

While generally anticipated, the timing was still a surprise, said Li Wei, an economist at Standard Chartered, in a report.

Li added that markets were disappointed that the central bank did not reduce the ratio before the Lunar New Year.

'Capital markets are likely to react positively,' he said.

The mainland needs to maintain a certain level of growth each year to generate new jobs and maintain social stability, economists say.

The recent cut is set to boost the confidence of market investors, who have waited for clear signs of an easing of monetary policy.

The cuts will become effective on February 24. After the cut, the ratio will be 20.5 per cent for big banks and 18.5 per cent for smaller banks.

The reduction will help lower small and medium enterprises' borrowing costs and interbank fund transfer prices.

Qu Hongbin, an HSBC China economist, said in a report the cut was 'a much-needed move to maintain liquidity and boost growth' as inflation was still on track to ease and liquidity conditions needed to be eased to support growth.

Economists expect more cuts to follow as Beijing aims to maintain an annual gross domestic product growth of 7 per cent in the next few years.

HSBC forecasts at least two more cuts this year. Standard Chartered projects four more cuts this year.

Qu said interest rate cuts would remain a secondary monetary policy tool of choice, adding that Beijing might cut interest rates by 25 basis points towards the middle of the year if inflation fell below 3 per cent.

Standard Chartered expects inflation to remain at about 2 per cent this year, rising to 3.6 per cent next year.

Premier Wen Jiabao said this month the central government might 'fine-tune' economic policies in the first quarter of this year. He said Beijing would closely monitor the global economic situation in case a 'proactive' response was needed.

It was the first signal from Wen that the government might review its macroeconomic policies in light of the global uncertainty caused by the euro-zone sovereign debt crisis and economic slowdown in the United States.

'The cut reflects that stimulating economic growth is currently the government's priority. January's batch of data, like new yuan loans and total social financing figures, reflected downside risks to the economy,' HSBC economist Ma Xiaoping said.

State-owned lenders issued 738.1 billion yuan in new loans last month, down 288.2 billion yuan or 28 per cent from the same month last year and well short of analyst forecasts for one trillion yuan.