PBoC cuts the RRR to support economy and face trade war – UOB

Head of Research at UOB Group Suan Teck Kin, CFA assessed the recent monetary policy measure by the PBoC.

Key Quotes

“In a widely expected move after the recent Cabinet meeting (4 Sep 2019), PBoC announced last Fri (6 Sep) the lowering of reserve requirement ratio (RRR) by 50 basis points for all banks, with an additional, targeted 100 bps cut for qualified smaller financial institutions”.

“PBoC’s latest move is clearly a counter-cyclical measure aimed at buffering the downward pressure on the broader economy as US-China trade tensions wear on. As we had factored in two RRR reductions for 2019 after the January announcement, we believe there is room for one more RRR cut in 4Q19”.

“By reducing the cost of funds for the banks, the RRR cuts could encourage banks to lower their Loan Prime Rate (LPR). Potentially, the PBoC will also be looking at directly lowering of borrowing costs through an easing in the Medium-term Lending Facility (MLF) rate which the LPR is pegged to”.

“However, RRR cuts in recent times appear to have mixed impact on the FX and equity market, especially in the few days surrounding the announcement, as other factors that are much larger at the time dominate investor sentiment”.