Societe Generale says more policy easing is needed because of the worrying trends in investment and credit. It expects one more interest rate cut of 25 basis points, albeit with deposit rate ceilings raised or removed completely, and two more reductions of 50 basis points in banks' reserve requirement ratios by the end of the year. Since interbank rates have fallen significantly, the next move is more likely to be a policy rate cut than a reserve ratio reduction. However, fiscal policy should now shoulder more responsibility. Banks' risk aversion and weak private sector credit demand have greatly mitigated the impact of monetary policy easing, but the on-budget fiscal policy has more room.
