Did PBOC actually RAISE some rates just now?7 June, 2012, 23:21. Posted by Zarathustra
Earlier the People’s Bank of China cut interest rates on both deposit and lending sides. We have also noted that interest rates cuts on longer maturities of deposits were larger than 25 basis points. While we had doubt that this is helping the economy to rebalance at all, there is one point that Société Générale’s Wei Yao reminded us of one crucial point that we overlooked.
The deposit rates are now allowed to be offered at a 10% premium (from no premium) to the benchmark while lending rates can be offered at a 20% discount (down from 10% discount). Taking that into account, the spread between deposits and lending rates will narrow (which is bad for Chinese banks). Not only that, taking that 10% premium into account, deposit rates can potentially go higher than before the interest rate cuts. And if these are indeed what banks are going to do, we realised that this is actually closer to our call for an asymmetric rate cut (i.e. more cut in lending rates but less or no cut in deposit rates), and that is actually rather more positive than when we first looked at it as far as rebalancing the economy is concerned, even though the overall view on the economy remains extremely bearish over the next few months to a year or so.