Increasing speculation of a PBOC RRR cut this month or next

There are some expectations about of a People’s Bank of China (PBOC) Reserve Requirement Ratio (RRR) cut this month, or in August, to boost long term liquidity and support bond buying.

Chinese state media, Securities Daily, cite the chief economist at CITIC Securities, saying that the PBOC may adopt measures such as lowering the reserve requirement ratio (RRR) to provide sufficient liquidity to the market

• In view of the current level of excess reserves and the potential pressure to issue government bonds, it is possible that the RRR cut will be implemented in July or August.

• It is not ruled out though that the PBOC will provide liquidity through open market operations or relending.

Head of macroeconomics for Asia-Pacific at UBS Global Wealth Management said the PBOC may further cut the RRR and interest rates in the remainder of the year to address low inflation

• Targeted low-cost lending facilities to support housing inventory acquisition would also be likely

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The Reserve Requirement Ratio (RRR) is a central bank regulation that sets the minimum amount of reserves each bank must hold in relation to their deposit liabilities. Its the percentage of total deposits that banks are legally required to keep on hand, either as cash in their vaults or in a reserve account at the central bank.

• In China, this ratio is set by the People’s Bank of China (PBOC).
• By adjusting the RRR, the PBOC can influence the lending capacity of commercial banks. For example, an increase in RRR means that banks have less money to lend out because they have to keep more in reserve. This reduces the money supply in the economy. Conversely, if the PBOC decreases the reserve ratio, banks have more money to lend because they are required to keep less in reserve. This increases the money supply in the economy, which can stimulate economic activity.

This article was written by Eamonn Sheridan at www.forexlive.com.