PBOC announces third rate cuts since July 2012

It explained the rationale in a statement.

The People's Bank of China (PBOC) announced on 10 May 2015 symmetrical rate cuts of 25bps in benchmark rates (BMR) of loans and deposits of all tenures except demand deposit rate effective 11 May 2015.

According to a research note from Barclays, further, the central bank also further raised the deposit rate ceiling from 1.3x to 1.5x, accelerating deposit rate liberalization.

Barclays' initial calculations show that the rate cuts could result in an average -3.1bps and -2.0% impact on NIMs and net profits in 2015E across the sector, under the scenario that banks maintain deposit rates at 1.2x benchmark rate.

Barclays' China economics team expects further benchmark rate cuts in a total of at least 50bps by 3Q15, in order to stabilize the economic growth, which in Barclays' view could put further pressure on China banks’ earnings growth but be positive for stock price due to lowered risk of economic hard landing.

Here's more from Barclays:

The PBOC announced symmetric interest rate cuts in the evening of 10 May 2015, effective on 11 May 2015; this is the third rate cuts since July 2012, after one conducted in November 2014 and another in March 2015.

The interest rate cut was symmetric with 1-year benchmark lending rate down by 25bps to 5.10% and the 1-year benchmark deposit rate down by 25bps to 2.25% while keeping demand deposit BMR unchanged at 0.35%.

The BMR for loan and deposits of all the other tenures were lowered by 25bps as well (Figure 1). Our China economics team expects further benchmark rate cuts in a total of at least 50bps by 3Q15 as well as two more RRR cuts by the same time.

Beside the BMR cut, the PBOC also further lifted the deposit rate ceiling to 1.5x from 1.3x the benchmark deposit rates, another major move towards interest rate deregulation. As a result, the maximum rate that a bank can offer on 1-year deposits is 3.38%.

The PBOC explained the rationale of the rate cuts in a Q&A statement subsequently published on its official website. Key messages from the statement include:

1) The central bank would like to further lower financial costs in the real economy despite declining loan yields and market interest rates observed in the past few months;

2) The acceleration of economic restructure and large volatility of external demand put greater pressure on China’s economy;

3) Low price environment led to real interest rates staying above historical average levels, providing more room for interest rate cuts.

The central bank explained that the rationale for further lifting deposit rate cap to 1.5x BMR include:

1) The launch of deposit insurance system, formally implemented on 1 May 2015, provides a good foundation for further deposit rate liberalization;

2) Currently, the abundant liquidity condition and declining market interest rate provide good conditions and timing for liberalizing deposit interest rate;

3) The central bank expects deposit competition to be rational with financial institutions not to set deposit rates at 1.5x BMR. The PBOC noticed that most financial institutions did not push their deposit rates to 1.3x BMR after the cap was lifted in March.