The People’s Bank of China on 10 May announced a 25 basis points cut in benchmark deposit and lending rates to 2.25% and 5.1%, respectively.
It was the third cut in interest rates since November, when China started easing its monetary policy to combat an economic slowdown. The latest move was in April, when the central bank slashed the bank's reserve requirement ratio (RRR) by 100 basis points, bringing the total RRR cut to 150 basis points since February.
Limited signs of growth and fears of deflation could be the reasons behind this week’s interest rate cut, said Aidan Yao, senior emerging market economist at AXA IM.
“Deflation fears still loom large. In line with the sluggish economic backdrop, the inflation dynamics remain disconcerting.
“The latest consumer price index (1.5% year-on-year) and producer price (-4.6% year-on-year) data shows that the economy is not out of the woods yet with respect to falling prices,” Yao said.
AXA expects one more interest rate cut of 25 basis points during the second half of the year. The firm also expects two cuts of 50 basis point each in RRR for rest of the year, Yao said.
“While nascent signs of economic stabilisation are emerging, we think more easing is warranted, given the still significant downside risks in the economy and an uncertain external environment,” he said.
Schroders believes the easing trend will accelerate during the rest of 2015.
“One implication might be that April’s data is weaker than expected, certainly the trade and PMI [purchasing managers index] data so far would suggest as much. We think GDP growth is likely to slow further in the second quarter,” said Craig Botham, emerging markets economist at Schroders.
China’s economic growth slowed to 7.4% in 2014 from 7.7% in 2013, the weakest in 24 years. The economy grew by 7% in the first quarter of 2015.
Meanwhile, both AXA IM and Schroders believe the central bank’s measures so far have not lowered lending rates enough, even though the rate is at 5.1%.
“Interest rates across the curve have fallen rapidly in recent weeks. While this has allowed banks to mark down their lending rates, by 22 basis points in the first quarter, more pass-through is clearly needed to bring genuine funding relief to the economy (see chart),” Yao of AXA IM said.
Source: AXA Investment Managers
Schroders also believes lending rates in China remain high.
“The People’s Bank of China's quarterly report showed that despite the easing measures introduced, effective rates [lending rates] in China remain elevated, and the low level of inflation means real effective rates are higher at present than their 2014 average,” the firm said.