PBoC will not hesitate to ease further if needed

The PBoC cut the reserve requirement ratio for large banks (RRR) by 50bp (effective 6 Sept) as most in the market had been expecting for some time. In addition, the central bank also lowered benchmark deposit rates and lending rates by 25bp. The 1Y benchmark deposit rate now stands at 1.75% and the corresponding lending rate is at 4.60%.

The immediate liquidity situation was expected to ease after this measure, outflow and depreciation concerns, and relatedly FX intervention are still expected to drain liquidity going forwards. 

"Also from the macro point of view should there be an increasing risk of deteriorating growth, going forward the central bank will likely act again to support the credit needs of investment projects. Therefore, further RRR cuts in the coming months and quarters cannot be ruled out. The central bank is expected to continue to provide liquidity via other tools such as the MLF that has recently been used", argues CAB Bank in a research note on Wednesday.