China cuts interest rates, what do economists say?

The People's Bank of China's interest rate cut to meet its 5% growth target is seen as a positive sign. However, Beijing still needs to consider more fiscal measures.

For the first time in months, China's central bank has made 14-day cash available to its banking system at a lower interest rate, signaling its intention to further ease monetary conditions. (Source: Getty)

On October 21, the People's Bank of China (PBOC) cut its benchmark lending rate by 25 basis points in its monthly adjustment period. Accordingly, the one-year benchmark lending rate fell to 3.1%, and the five-year benchmark lending rate fell to 3.6%.

The cut was announced just days after the country reported quarterly growth of 4.6%, its lowest in a year and a half, threatening its 5% annual growth target.

Previously, on October 18, at a forum held in Beijing, PBOC Governor Pan Gongsheng mentioned the plan to cut interest rates by 0.25%, emphasizing that the 7-day reverse repo rate will be cut by 20 basis points, and the medium-term lending rate will be cut by 30 basis points.

Authorities are considering cutting commercial reserve requirements this year, the official said.

Shane Oliver, head of investment strategy at Pinpoint Asset Management, said the monetary stimulus campaign is at least “on a significant scale in China,” but cuts alone are not enough to boost the economy. “The cost of money, money supply, is not the real problem in China, the real problem is lack of demand, so fiscal stimulus is more important,” he said.

The cut is “a positive sign,” but despite the reduction, real interest rates in China are still “too high,” according to Zhang Zhiwei, chairman and chief economist at Pinpoint Asset Management. He expects more cuts next year, following the US Federal Reserve’s rate cuts.

Thus, although the interest rate cut brings a positive signal to stimulate the economy to achieve its growth target in the last two months of the year, China still needs to consider additional fiscal measures.

The PBOC announced a 50 basis point cut in banks' reserve requirement ratio and a 20 basis point cut in the 7-day reverse refinancing rate on September 24, launching its most aggressive stimulus program since the Covid-19 pandemic emerged, including measures to support the struggling real estate sector and boost domestic consumption.

Previously, China also surprised by cutting short-term and long-term lending rates in July.

Source: https://baoquocte.vn/trung-quoc-cat-giam-lai-suat-chuyen-gia-kinh-te-noi-gi-291066.html