PIMCO’s Toloui Expects Moderate Impact After China Rate Cut

Ramin Toloui, Pacific Investment Management Co.’s global co-head of emerging markets portfolio management in Singapore, comments by e-mail on China’s decision to cut interest rates for the first time since 2008.

“The catalyst for the move is growing recognition by Beijing authorities of the extent of the weakening economic picture. The rate cut is an indication of greater policy engagement but not harbinger of an ‘all in’ policy response. The macro impact will be moderate and we still expect growth in the mid-7% area for 2012. Key to watch will be the data on new loans in the coming weeks and months, to gauge the extent to which liquidity is reaching the broader economy.”

“China’s action is an incremental positive for global demand, but only at the margin. The trajectory of the global economy will be driven primarily by the situation in Europe and the weak recovery in the US.”

“The adjustment on the deposit ceiling is an important step toward interest rate deregulation reform. That said, it is premature to say that this signals a broader acceleration of the policy reform agenda. In the short run, we could see competitive pressure pushing up deposit rates, taking back some of the impact of the deposit rate cut. This could have an ambiguous effect on near-term aggregate demand: while it would squeeze the banks’ net interest margins & possibly reduce their risk appetite, maintaining the level of deposit rates helps prevent a negative income effect for households that might otherwise contract household spending. In the longer run, interest rate reform is a key component of shifting the domestic economy from investment to household consumption.

— With assistance by Nick Wadhams, and Kevin Hamlin

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