PBOC Cuts Interest Rate for Excess Reserves for First Time since 2018

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The Chinese central bank has unveiled a fresh set of monetary measures to curb the impacts of the COVID-19 outbreak on China’s economy.

PBOC recently announced that it would implement a targeted cut to the required reserve ratio (RRR) for smaller banks, comprised of two cuts of 0.5 percentage points scheduled for 15 April and 15 May.

The move is the third cut to the RRR since the start of 2020, and specifically targets rural credit societies, rural commercial banks and rural cooperative banks, as well as municipal commercial banks that only operate within a given province.

The targeted cut is expected by PBOC to directly unleash 400 billion yuan in long-term funds, or an average of 100 million yuan for each banking institution recipient; as well as reduce bank funding costs by an average of 6 billion yuan each year.

PBOC has also announced that it will reduce the interest rate for excess reserves deposited with it from 0.72% to 0.35% on 7 April, for the first reduction since 2008.

The Chinese central bank said that it hopes the move will push banks to increase the efficiency of their funds usage.

Following the RRR cut over 4000 small and medium-sized depository financial institutions will see their RRR fall to 6%, for a comparatively low level in China’s modern history.

In January 2020 PBOC reduced the RRR by 0.5 percentage points to release 800 billion yuan, while in March it reduced the RRR to unleash a further 550 billion yuan for financial inclusion loans.

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