China central bank eases bank reserve requirements
It cut the RRR by 50 basis points and will free up RMB420 billion which will help spur economic growth, says CIMB.
Reserve requirements for banks could be lowered two more times before the year ends, according to the brokerage firm, but interest rates should hold firm given current global growth levels.
Here's more from CIMB:
No surprise with the latest RRR cut. While its timing had been flagged by the profile of maturing OMO papers, the move would still be applauded by the market, for proactively supporting growth. Amid renewed angst over global growth and with inflation no longer taking center stage, the cut signals that economic growth is firmly back as the No. 1 concern. We continue to predict two more RRR cuts, to bring the top RRR rate to 19% by end-2012.
Third RRR cut in this easing cycle. The People’s Bank of China (PBoC) announced over the weekend that effective 18 May, the reserve requirement ratio (RRR) for banks will be cut by 50bp, its second such move in 2012, and the third in this easing cycle (50bp cut in Feb 12 and Dec 11). The RRR will be 20% for larger banks, and 18% for medium-sized banks, excluding any dynamic RRR adjustments. This will free up Rmb420bn of liquidity. The latest move was expected, the direct trigger being soft across-the board macro data in April. While we argue that the maturing profile of OMO papers also had a lot to do with the latest move, the cut comes at an opportune time of moderating inflation and property prices, in a more challenging external world.
Two more RRR cuts likely, before year-end. The move will be applauded by the market for being proactive, signaling that economic growth is now firmly the central bank’s top priority. We expect policy easing to continue, given a dearth of maturing OMO papers in 2H12, to support new loans of Rmb8tr and M2 growth of 14%.
No change to our call of another two more RRR cuts in 2012, with one likely in late 2Q12 or early 3Q12. We don't see the need for an interest-rate cut yet (unless global growth unexpectedly implodes), since real rates are still barely positive.
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