Nomura sees further RRR cuts through 2019

NOMURA expects China’s central bank to cut the reserve requirement ratio a total 250 basis points next year, with the first cut likely come in January as market demand for liquidity is estimated to surge ahead of the country’s Lunar New Year the following month.

Nomura said it based its forecast on China's  liquidity conditions and the need to support growth.

And the first 100 basis point cut will be highly likely to come in January, ahead of the country’s traditional new year falling on 5 February, as the holiday usually sees seasonally stronger liquidity demand.

If there is no further support from monetary easing or stimulus measures, the liquidity gap over January-February would reach 3 trillion yuan (US$4.35 billion) , with two thirds coming from seasonally higher liquidity demand, Nomura said.

The research team said that the first cut could inject 1.3 trillion yuan of liquidity into the banking system, based on the central bank’s estimates.

Compared with other policy measures, such as medium-term lending facility or the recent move called “targeted medium-term lending facility”, a cut in the RRR cut is preferred by banks, as such funds are cheaper and more stable.

The PBOC’s interest rate on commercial banks’ required reserve for deposits is just 1.62 percent, much lower than the one-year MLF and TMLF rates of 3.30 percent and 3.15 percent respectively.

A lending facility is a source of funds that can support financial institutions in asking for additional capital.

On December 19, the PBOC introduced a new lending facility called TMLF to encourage commercial banks to increase lending to small and private enterprises.

The PBOC has cut the RRR four times by a combined 250 basis points so far this year and Nomura said it continues to believe China’s rates will be likely to head lower in 2019.