The PBOC has done the expected — a 50 bp cut to bank RRRs and 25 bp cut in benchmark rates — but the timing is something of a surprise coming after a 2-day stock plunge. Perhaps in shifting back to more conventional tools after halting its equity interventions, Beijing wanted to also separate this economic/liquidity measure from one tied to the fast-falling market. Importantly, the PBOC also scrapped the upward cap on bank deposits for 1-yr or more. Along with the depegging USD/CNY, this is an important step in making the economy more interest rate sensitive and where monetary policy doesn’t work within the confines of those dictated by softly following the USD and Fed. Ultimately with the RRR cuts, the PBOC is still countering the natural impact of capital outflows, while the rate cut helps reduce real rates. If so, slight RMB weakness will help take some of the pressure off declining FX reserves. Chart 1) http://link.reuters.com/sum99t 2) http://link.reuters.com/bud74w 3) http://link.reuters.com/qyk45w [IFR]
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