The People's Bank of China Cut the Interest Rate to Give the Looser Monetary Pol

The People's Bank of China Cut the Interest Rate to Give the Looser Monetary Policy in 2009

Source:24 December, 2008 11:45

[Shihua Financial Information]Besides fixing the looser monetary policy for the next year, the interest rate cutting at year end was also forward looking, so that the monetary policy could take precautions and serve the macro-economy better.

According to the news from Shanghai Securities Newspaper on December 24, the People's Bank of China once again lowered the ruling rate of interest for deposit and loan within less than one month after 108 basic points thereof were reduced on November 27. As per the time schedule for this run of interest rate cut, it is quite possible for the People's Bank of China to cut the interest rate with the outside market. On December 16, Federal Reserve Board declared the continuously reduction of the interest rate for the federal funds by 0-0.25 %. Soon afterwards, Central Bank of Japan lowered the ruling rate of interest by 0.2% to 0.1 %. With the dramatically interest rate cut in the US and Japan, It is commonly anticipated that the interest rate cutting will also occur in the Euro area. At this moment, China declared the slightly interest rate cut to follow up. So, China's interest rate cut is different in approach but equally satisfactory in result with the interest rate cut carried out by big seven central banks in the world on October 8.

For the specific conditions of interest rate cut, we could see that this” Double Cutting" protected the commercial bank to the certain extent, among which, the ruling rate of interest for RMB deposit was lowed by 0.27%, while the ruling rate of interest for the loan was lowered by 0.18% except the one-year term. Such arrangement buffered the narrowing of the bank's margin when the interest rate for the demand deposit is unchanged. Moreover, the rate of reserve against deposit was lowered by 0.5%, so as to release RMB 231.2 billion from the deposit-based financial institutions. Such funds could be used in high profit channels such as bond investment and loan, so as to partially neutralize the influence from margin narrowing arising from the interest rate.

Objectively, the interest rate cut features hysteresis quality and long-time cycle. Therefore, as answering the reverse running of the economic cycle, the marginal effect thereof is always decreased progressively. Also, the policy anticipation could not be realized in such a short time. Before dramatically cutting the interest rate by 108 points, the People's Bank of China lowered 63 points thereof in total. However, the investment demand was not effectively stimulated. The relevant data displays that in November, loan was increased to RMB 476.9 billion, increasing by RMB 389.5 billion year-on-year. It seems improvement was greatly made as compared with RMB 181.9 billion in October. But, the growth year-on-year failed to cover the fact that the loan at the link relative ratio was lowered. In November, the balance of loan accounted for RMB 2.957 billion, decreasing by RMB 260 billion as compared with that at last month. In other words, after the interest rate cut for several times, the borrowing needs do not grow substantially.

Thus, I thought the slightly interest rate cut shall not be simply deemed as the adjustment for drop of 108 points previously. In fact, it set the keynote for the monetary policy in 2009. After the dramatically interest rate cut on November 27, it was commonly anticipated that the probability of re-cutting of the interest rate was very little before the release of the data for the macro-economy at the first quarter of 2009. The reason was that the monetary policy did not get effect instantly. The effectiveness thereof could not be produced until the observation for a period of time. However, this time it was unexpected that the People's Bank of China cut the interest rate within such short period of time at the year end. Besides echoing the outside market, the more important factor was to remove the anticipation for interest rate cut. After all, at the end of the year, most enterprises are making preparations for the capital arrangement in 2009.

Relevant financial information community

If the interest rate cut is expected at the first quarter of 2009, most of the investment plans will be postponed. This is bad for the healthy development of the entity's economy.

We could see that after the interest rate cut for five times, the ruling rate of interest for the loan was lowered by 198 points in total. So, the reduction was quite large. However, the influence on keep the growth should be verified by the macro-economy data. For the operating space of the monetary policy, USA and Japan are hard to make any progress, while more flexibility is available for the People’s Bank of China. Besides fixing the looser monetary policy for the next year, the interest rate cut at year end was also forward looking, so that the monetary policy could take precautions and serve the macro-economy better.