China cuts interest rates over the weekend

In a widely anticipated move, the Peoples Bank of China, on Saturday cut its benchmark interest rates by 25bps, bringing down its one year bank rate to 5.35% from 5.6%. The PBoC had cut interest rates earlier in November 2014. The one-year deposit rate was also cut by 25bps, bringing it to 2.5%. The rates come into effect from 1st of March 2015. The monetary policy decision comes hot on the heels of a reserve requirement ratio cut in February enabling banks to lend a higher share of their assets.

Few weeks ago, the inflation rate from China showed a massive dip, falling to 0.8% from 1.5%. GDP growth also slowed down as the annual growth rate in the fourth quarter of 2014 has remained stubbornly stuck to the 7.3% mark. We had previously called for further easing from the PBoC in our previous commentary found here.

China has already been struggling with massive debts from previous stimulus packages and refrained from doing so sticking to the conventional monetary policy tools. Rising debt has been a cause for concern with the risk that companies would make use of additional easing and pile on more debt.

The rate cut announcement came ahead of the Manufacturing PMI data released on Sunday, which showed a modest rise to 49.9 from estimates of 49.7 and a point higher from the previous 49.8. Non-manufacturing PMI however continued to show a healthy pace of growth at 53.9, up from 53.7 previously.

With only rate cuts and no monetary stimulus, the market reaction was quite muted and commodity risk currencies including the Australia and the Kiwi dollar opened the week on a somber note, declining across the board.

The late Asian trading session saw the Aussie dollar fall towards the lows of 0.776 while the Kiwi dollar managed to keep its declines in check falling to 0.752 levels against the Greenback. Asian equity markets were however trading in the green with most of the indices trading 0.08% on average higher. The Shanghai composite was however the leader, rising 0.24% on the weekend news. Traditionally, any easing efforts from China has helped the Australian and the Kiwi dollars to rally, but in this case, with only an interest rate cut to go by the reaction from these two currencies was quite muted. The Yen remained firm but mixed across the board, weaker against the Greenback but fairly strong against other currencies.

With the start of a new trading month, the economic calendar is packed this week as other Central Bankers prepare to meet and decide on their monthly monetary policy. On schedule will be interest rate decisions from the Bank of Canada, the RBA, the ECB and the Bank of England, with the most important of these coming from the RBA where consensus is expecting to see another rate cut by 25bps. It was only last month that the RBA had cut its interest rates and should the RBA announce another rate cut, it would be considered a very aggressive move and could potentially weaken the Australian dollar in the near term.