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Analysts expect no deposit interest cuts this year

By Xu Shenglan (chinadaily.com.cn)
Updated: 2008-09-29 14:04

Despite the latest cuts in loan interest rate and reserve requirement ratio, the country will not make drastic changes in its tightening monetary policy in the short term, as analysts said the deposit interest rate is unlikely to be lowered this year due to high inflation pressure, China Business Journal reported yesterday.

Shift of macro-economic policy

The central bank reduced the benchmark loan interest rate and the reserve requirement ratio for commercial banks on September 15. The adjustment, which was previously expected to come at the end of this year, was brought forward because of the escalating Wall Street financial turmoil, market watchers said.

China is unlikely to face serious inflationary pressure in the long term, and the latest rate cuts reflects financial authority's policy focus is shifting from curbing inflation to ensuring a steady and rapid economic growth, Li Yang, Director of the Financial Institute of the Chinese Academy of Social Science said in a recent macro-economic forum.

The government's policy has clearly pointed that in the following six months, the country will pay more attention to economic growth rather than inflation, said Li Jing, chairman of China equities department of JP Morgan.

"Banks' reserve requirement ratio may be further reduced by 1 to 2 percentage points, and the lending interest rate may get lower in the coming months", Li added.

Deposit interest cut unlikely

Wu Xiaoling, vice-chairperson of the Financial and Economic Committee of the National People's Congress and member of the Monetary Policy Committee, said recently given the existing inflationary pressure, the tightening monetary policy has not turned around. She prefers to define the current policy as a "moderate-tightening monetary policy". This is the highest-level official comment since the rate adjustment.

"The current monetary policy is under adjustment rather than an overall change," said economist Wang Xiaoguang. "The deposit interest rate is unlikely to be changed in next half of the year."

For Chinese bank account holders, the level of the deposit interest rate has lagged behind that of the inflation rate for 19 months.

Although China's consumer price index (CPI) in August dropped down to 4.9 percent, but the average level of this year is expected to be around 6 percent. In this case, residents' one-year deposit interest rate, which is 3.93 percent after tax, will be 2 percent points behind the inflation rate in 2008.

"The central bank is very cautious about the deposit interest rate adjustment, which also needs to consider the inflationary impacts," said a source close to the banking regulator. "Therefore, the rate is unlikely to be cut within the year."