China reverts to conventional rate cuts to prevent sharp drop in growth

HONG KONG – BBVA Bank says the decision by China to cut benchmark interest rates for the first time since July 2012, effective from November 22, is asymmetric in the sense that the one-year benchmark lending rate was lowered by 40 bps to 5.6% while the one-year deposit benchmark rate was trimmed to 2.75% from 3.0%.

Meanwhile, the PBoC announcement that the permissible floating range of deposit rates is expanded to 20% (versus 10% previously) above benchmark deposit rates also constitutes an additional step in interest rate liberalisation and reaffirms the authorities’ resolution to push for structural reforms, BBVA says.

As a result, the effective deposit rates (the highest rates that banks can offer to their depositors) will remain at 3.3% unchanged. The interest rate cut is a welcome development although its effectiveness might be limited by “the tight liquidity condition. We therefore maintain our growth projection (for China) of 7.3% in 2014 and 7.0% in 2015. www.bbvaresearch.com (ATI).