PBoC’s RRR cut likely to engineer a credit impulse into the economy, says ANZ Research

The People’s Bank of China (PBoC) has cut the reserve requirement ratio (RRR) for most banks by 100bps, effective from October 15. According to the official press release, the cut will release a total of CNY1.2 trillion into the banking system. The RRR cut will engineer a credit impulse into the economy, representing  an upside risk to growth, according to the latest report from ANZ Research.

The RRR cut is a target one which aims to replace the PBoC’s medium-term lending facility (MLF) of CNY450 billion. Therefore, the action will still result in a net injection of CNY750 billion. The PBoC also reiterated that China’s M2 money supply growth will be kept stable and the RRR cut will not fuel depreciation pressure on the yuan’s exchange rate.

The central bank aims to increase the effect of money multiplier. By lowering the reserve requirement ratio, banks are effectively encouraged to lend. China can thus create money supply through credit expansion and utilise the existing level of the monetary base more efficiently.

"After today’s announcement in the RRR cut, we expect a further cut in January 2019. As we previously forecast in our insight note, the PBoC has started to normalise policy and they will continue to lower the RRR," ANZ Research commented in its report.