PBOC Done Cutting Benchmark Rates, According to Economist Survey

Will Latest Efforts by ECB, PBOC Really Impact Growth?
  • Benchmark rates projected to be held at record lows until 2017
  • One more RRR cut coming this year, economists say in survey

China’s central bank will refrain from further benchmark interest-rate cuts and economic growth will hold steady in the fourth quarter, according to economists surveyed by Bloomberg News.

Growth in the final three months will be 6.9 percent from a year earlier, according to the median of analysts estimates in an Oct. 19-27 survey. That’s more optimistic than the 6.8 percent projected for the quarter in an earlier poll.

The People’s Bank of China will make one more cut to banks’ required reserve ratio this year but leave both the lending and deposit interest rates at current levels through to 2017, according to the survey. Policy makers lowered the benchmark rate last week for a sixth time in a year after third-quarter growth came in at the weakest rate since 2009.

“The PBOC may cut the RRR one more time this year and increase central bank lending to make monetary policy transmission more efficient and reduce effective financing costs,” Bian Quanshui, a China economy analyst at China International Capital Corp. in Beijing, wrote in a note. “Lower real interest rates will help stabilize economic growth and prices.”

The central bank said late Friday it would cut benchmark interest rates, stepping up the battle against deflationary pressures. Policy makers also reduced the amount of deposits banks must hold as reserves, adding liquidity that’s been drained by increasing capital outflows since August’s yuan devaluation. A gauge of capital outflows compiled by Bloomberg surged to a record $194.3 billion in September.

The rate cut came just before this week’s gathering of China’s top leaders, who are gathering in Beijing to formulate the 13th five-year plan while confronting an era of sub-7 percent growth for the first time since Deng Xiaoping opened the nation to the outside world in the late 1970s. The world’s second-largest economy grew 7 percent in both of the first two quarters of this year, in line with Premier Li Keqiang’s goal, before the expansion slipped to 6.9 percent in the third quarter.

Some alternative readings suggest the growth pace is even slower. Bloomberg Intelligence economists Tom Orlik and Fielding Chen say "official numbers may be upward biased during downturns."

UBS Group AG chief China economist Wang Tao expects the PBOC will cut rates one more time this year, probably in December, and again in early 2016 to bring the lending rate to 3.85 percent and the one-year deposit rate to 1 percent. 

“This would push real deposit rate into negative territory,” as has often happened in the past, Tao wrote in a report. That could “encourage consumption, support asset prices and anchor inflation expectations.”

Forecasters expect growth to decelerate to 6.5 percent in 2016 and to 6.3 percent the following year, the survey showed, down from an anticipated 6.9 percent for 2015.

“Policymakers are serious about defending the 7 percent growth target this year,” Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, said in a recent note. He expects the central bank to make one more RRR cut this year while leaving the main rate unchanged.

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