In a surprise move, the People’s Bank of China cut its reserve requirement ratio for its commercial banks on Wednesday by 0.50%. It was the first reduction in the reserve ratio in almost three years and appears to signal an end to the country’s monetary tightening campaign.
Although the growth rate of the Chinese economy is the envy of developed nations around the globe, the rate has slowed to a point that monetary officials felt a change in policy was warranted. Bloomberg reports that China’s economy is currently growing at rate of just 9.1% per year, which is the weakest level since 2009.
In a poll of 19 analysts conducted recently, Reuters reported Tuesday that the vast majority of those polled felt that China would begin cutting rates soon. Ten analysts believed the PBOC would begin cutting rates in December while another 8 expected rates to start falling before the end of the first quarter.
The move by the PBOC was the first time the central bank has taken steps to loosen monetary policy since 2008. The new reserve ratio of 21% (down from 21.5%) will go into effect on December 5th.
Recall that the PBOC had foreshadowed the move by allowing the reserve requirements of more than 20 rural credit banks to fall recently.
With inflation in China falling to the lowest level seen in five months, the economy’s growth rate slowing to the slowest rate in two years, and export growth also pulling back, the PBOC appears to have taken the first step toward monetary easing.
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