Another Round of Chinese Central Bank Rate Reductions

May 10, 2015

The Monetary Policy Committee at the People’s Bank of China cut both its one-year lending and one-year deposit rates by 25 basis points to 5.10% and 2.25%, matching the prior round of cuts in February and bringing the cumulative declines since November to 90 basis points and 75 bps.  Previous cuts totaling 56 bps and 51 bps were done in June and July of 2012, and the prior peak in rates was reached in April 2011.  In formally justifying the latest round of cuts, officials noted historically high real interest rates caused by low inflation, observed lower-than-desired growth trends in GDP and jobs, and complained about the burden of servicing mounting Chinese debt.    There is an uneasiness among private analysts that China may be poised for the kind of debt indigestion that sent Japan’s economy into a prolonged funk 25 years ago.  Monetary policy actions taken during the past half year to stop China’s growth slowdown have thus far not yield discernible results.  Besides interest rate cuts, reserve requirements were reduced three months ago, and this time officials also announced that banks would be allowed to pay higher interest on savings accounts.  In April, Chinese consumer prices posted a second straight monthly decline, rose by a smaller-than-forecast 1.5% on year.  Producer prices, exports, and imports plunged 4.6%, 6.2% and 16.1% between April 2014 and April 2015.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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