The People’s Bank of China (PBoC) surprised markets by announcing cuts to the lending and deposit rates, while reducing the amount of capital banks most hold against loans. In a move normally made on a weekend, the one year lending rate and deposit rate was reduced by 25bps to 4.6% and 1.75% respectively and the bank reserve requirements was reduced from 18.5% to 18%.
The surprise cuts initially put a rocket under global equity markets and reversed the flow to bond markets. However, it was short lived and US equity markets ended the day in the red and Treasury bond yields falling. While the cuts were a surprise, the change in the reserve requirement had been discussed for weeks and were partially seen as form of quarantining the tightening effects of recent foreign exchange interventions by the PBoC.
Credit Suisse questioned the effectiveness of the measures on the real economy saying China’s attempt at replacing private investment with public investment was mistaken. However, the bank said injecting liquidity “after the interest rate and RRR cuts is another small step by the PBoC towards its goal of restoring market confidence.”