China cuts interest rates unexpectedly in order to boost banking liquidity and the economy.

The city of Hong Kong
In an effort to keep money flowing through the financial system and support the economy, China’s central bank has made an unexpected reduction in the amount of money that banks must keep in reserve.

The People’s Bank of China (PBOC) announced on March 27 that it would reduce the reserve requirement ratio (RRR) for almost all banks by 0.25 percentage points.

“[We must] implement a balanced set of macroeconomic policies, better serve the real economy, and maintain reasonable and sufficient liquidity in the banking system,” the PBOC said in a statement.

The late Friday move was unexpected and comes after a week of turmoil in global financial markets caused by the failure of some regional US banks.

As recently as Wednesday, Goldman Sachs analysts predicted that the PBOC would keep interest rates and the RRR “unchanged” through the first half of 2023.

According to analysts, the central bank has already injected hundreds of billions of yuan into the banking system since January, primarily through a medium-term lending facility.

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The rapid failure of two US banks, as well as problems at Credit Suisse, have raised concerns about the global banking sector’s health.

Since Sunday, regulators on both sides of the Atlantic have taken emergency measures to help troubled lenders and restore trust in the banking system. On Thursday, a group of America’s largest banks stepped in to provide a $30 billion lifeline to First Republic Bank.

Earlier this month, Yi Gang, governor of the PBOC, hinted at a press conference that monetary policy will be relatively stable this year.

“The current level of real interest rates is about right,” he says.

However, he acknowledged that the RRR reduction “remains an effective monetary policy tool” for providing long-term liquidity and bolstering the economy.

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