There are some expectations that the People’s Bank of China will cut the reserve requirement ratio this month, or in August, to boost long-term liquidity and support bond buying.
The People’s Bank of China may adopt measures such as cutting the reserve requirement ratio (RRR) to provide sufficient liquidity to the market, Securities Daily, a Chinese state media outlet, quoted the chief economist at CITIC Securities as saying.
-
Given the current level of excess reserves and potential pressure to issue government bonds, a cut in the reserve requirement ratio could be implemented in July or August.
- But it is not unlikely that the People’s Bank of China will provide liquidity through open market operations or re-lending.
The People’s Bank of China may cut reserve requirement ratios and interest rates further in the rest of the year to tackle low inflation, the head of Asia-Pacific macroeconomics at UBS Global Wealth Management said.
- Targeted low-cost lending facilities are also likely to be made available to support the purchase of housing stock.
—
The reserve requirement ratio (RRR) is a regulation issued by the central bank that sets the minimum reserves that each bank must hold in relation to deposit liabilities. It is the percentage of total deposits that banks are legally required to keep on hand, either in cash in their vaults or in a reserve account with the central bank.
- In China, this ratio is set by the People’s Bank of China (PBOC).
- By adjusting the reserve requirement ratio, the PBOC can influence the lending capacity of commercial banks. For example, an increase in the reserve requirement ratio means that banks have less money to lend because they are required to hold more reserves. This reduces the money supply in the economy. Conversely, if the PBOC lowers the reserve ratio, banks have more money to lend because they are required to hold less reserves. This increases the money supply in the economy, which can stimulate economic activity.
