Interest rate cut by People’s Bank of China.docVIP

Interest rate cut by People’s Bank of China 　　 Interest rate cut by People’s Bank of China 　　On May 12th， China’s central bank， the People’s Bank of China announced the benchmark deposit and loan interest rates cut by 25 basis points. It also decided to lift up the upper bound of the floating band of deposit rates to 1.5 times the benchmark from the previous 1.3 times. 　　China’s benchmark interest rate cut and the increase of upper limit of the floating band of deposit rates would have positive effects to the Chinese economy， especially for supporting the private sector. 　　The People’s Bank of China faces kind of policy tradeoff between withstanding disinflation risk and the downward pressure of Renminbi. 　　In April， the central bank reduced the bank reserve/deposit ratio by one percentage point， but did not reduce the interest rate at the same time. The reason was not to affect the stability of the RMB exchange rate. Now that the RMB exchange rate has been stable and the CPI is historically low in recent years， the risk in destabilizing the RMB exchange rate is low. Hence， the impact of reducing the interest rate by a quarter percentage point on RMB is expected to be small. 　　The policy adjustment timing is important as the Chinese government does not wish GDP growth in the second quarter of 2015 to be any lower than seven percent. Meanwhile， the scale of reduction is moderate because the central bank is still cautious not to upset the exchange market. 　　Mao Lei， Assistant Professor at Warwick Business School， said the timing is earlier than his expectation， but there is nothing special about the rate cut itself， as the Chinese economy continues to slow down and manufacturing sector is still weak. 　　Mao highlighted that：” What is more interesting is that now the banks will have more space to determine the loan rate. With the upper bound of the loan rate increases， it should be viewed as an effort to make financing easier for the private sector， since th