Wednesday, November 30, 2011

People's Bank of China Drops RRR 50bps to 21%

The People's Bank of China announced a 50 basis point reduction in the required reserve ratios for deposit taking financial institutions, effective 5th December 2011.  The new required reserve ratios will average 21.00% for large banks, and 19.00% for small banks.  The move potentially marks a shift in policy focus to growth by the Chinese authorities, and follows the news last week that the required reserve ratio would be reduced for selected rural cooperative banks by 50 basis points to 16.00%, and also coincides with coordinated policy action by some of the key central banks to support the Eurozone.

The People's Bank of China last raised the reserve requirements by 50 basis points in June this year to an average 21.50% for large banks, and 19.50% for small banks.  The PBC also adjusted the reserve requirement rules in August, effectively resulting in tightening of about 100bps.  Meanwhile the People's Bank of China last raised the benchmark interest rate 25bps to 6.56% in early July this year.  The Bank for International Settlements recently published a paper on 'China's Evolving Reserve Requirements' which provides an interesting and detailed analysis of the People's Bank of China's use of the required reserve ratio as a tool for monetary policy.


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