BEIJING — China’s recent move to cut interest rates and lower the reserve requirement ratio (RRR) was very different from quantitative easing (QE), the central bank said in a statement on Oct 26.
QE is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. QE is often considered a last resort to stimulate the economy if a recession or depression continues even when a central bank has lowered interest rates to zero and can no longer lower interest rates, said the statement by the People’s Bank of China (PBoC).
The PBoC cut its benchmark one-year lending and deposit rates by 25 basis points each to 4.35 percent and 1.5 percent, starting from Oct 24.
However, PBoC’s interest rate and RRR cuts this time are “obviously” conventional monetary measures given China’s interest rates are way above zero and the central bank is not yet constrained by zero interest rate policy.
The central bank also cut the RRR for all financial institutions by 50 basis points. After the cut, the RRR stands at 17 percent for large financial institutions and 13.5 percent for small and medium financial institutions.
China still has large room to maneuver interest rates and RRR policy tools to inject liquidity to boost economy.
Therefore, the rate cut on Oct 23 should not be interpreted as QE, which is distinguished from standard central banking monetary policies.
This is the fifth RRR reduction in nearly nine months and the sixth round of interest cuts in nearly 11 months.