The People’s Bank of China (PBOC) decided to cut reserve requirement ratios for banks and benchmark interest rates in a move that has sent European stocks soaring and the U.S. dollar rallying. The interest rate cut by 25 basis point will be effective starting tomorrow, while the reserve requirement ratio will be in force from September the 6th.
The 1-year lending rate has been cut to 4.6 percent, while the deposit rate is now at 1.75 percent after both having been reduced by 25 basis points. The reserve requirement ratio for commercial banks in China has been cut by 50 basis points to 18 per cent in an effort to cushion the credit cycle effects on the country’s economy.
The PBOC has also telegraphed that it is lifting the ceiling from deposit rates with terms longer than one year, and the reserve requirement ratio has been cut in order to supplement the liquidity gap that formed in the aftermath of the Chinese yuan devaluation move last week.
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According to a statement issued by the PBOC, the Chinese economy is still facing downward pressure and global financial markets are seeing big volatility. The central bank also emphasized that inflation remains low and the cut in reserve requirement ratios will alleviate the shortfall in liquidity caused by the foreign exchange market moves.
The move could be preceding a larger foreign exchange reform in China as the central bank emphasized that the relatively low upward pressure on interest rates could open a window towards a larger interest rates reform.
The German DAX index is currently up over 4 percent on the day while U.S. equity futures are holding steady gains with the S&P500 up by 3.4 percent. The U.S. dollar is back to strength rallying across the board after the move. The EUR/USD rate is currently about 1 percent lower on the day as the pair trades close to 1.1480.