PBoC to the rescue!

Last week the People ’ s Bank of China (PBoC) cut its leading interest rates. The one - year benchmark deposit rate was cut by 25bp to 2.75% and the one - year benchmark lending rate was cut by 40bp to 5.6%. As the lending rates have largely been liberalised, the one - year deposit rate is now the more important of the two benchmark interest rates.

While it was clear that there was a slight easing bi as in monetary policy in China, the interest rate cut was nonetheless a bit of a surprise. It suggests that China now has a more substantial easing bias in monetary policy and that the government’s attempt to contain credit growth will be loosened somewhat in coming months. Hence, supporting growth now appears to be a higher priority.

The implication of the interest rate cut is that Chinese growth has probably bottomed out and should start to improve in Q1 when investment demand and particularly the proper ty market will start to rebound. The interest rate cut is particularly important for the property market where the 40bp cut in the benchmark lending rate is still important for mortgage interest rates. The growth outlook is definitely more positive for H1 15. However, we do not expect to see a sharp rebound in growth next year as the government will still be focused on managing financial risk and securing sustainable credit growth. Hence, the PBoC will continue to ease only cautiously and we do not expect i t to cut rates further. In addition, China remains in a structural slowdown, which will continue to weigh on growth further ahead.

The interest rate cut is extremely positive for risk sentiment and risky assets in general in financial markets and it is particularly positive for emerging markets and commodities. Hence, it should help commodity and Emerging Market currencies like the Brazilian real, Mexican peso, the South African rand and of course the Russian ruble.

2015 has been an extremely challengi ng year and at the centre of the troubles have been falling commodity prices and worries about Chinese growth. If the rate cut from the PBoC indeed signals a more dovish Chinese monet ary policy stance going forward, that should give some support for Emergi ng Markets in 2015. We certainly hope so!