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Economy · Macro · Markets
Fed’s sudden 50 basis point rate cut very compelling for People’s Bank of China to follow suit, but arrested epidemic should ‘spare’ the axe
2020/03/04 04:27:38

Mar 04, 2020 (China Knowledge) - It is rare that the G7 central bankers and Fed Chairman Jerome Powell could schedule a multiparty within a one-day notice. Yesterday’s meeting call resulted in Powell making an impromptu and rather big cut on Fed interest rate by 50 basis points.

The negative reactions surprised many as major indexes including the Dow and S&P 500 declined about 3%, unexpectedly; and the U.S 10-year Treasury fell to its lowest for the first to below 1%, signals a continued flight safer fixed-income assets.

The Asian market opens on today reacted mildly to the rate cut, with most equity markets in the negative territory and most Asian bonds hold steady showing preference over equities. These reactions to drastic 50 basis point rate cut have not boosted the global as expected. The fear of the further spread of coronavirus globally and the somewhat unfelt negative impacts yet that hasn’t come into full-blown on global supply chains resulted from affected China’s manufacturing for the past 8 weeks.

In light of current global market conditions, how will the People's Bank of China (PBoC) react after many countries follow suit with the Fed’s rate cuts? Many economists and investment banks are even expecting further cut to place in March or April.

But, on the contrary, most China’s local experts’ view in coming weeks is that the PBoC is unlikely to cut interest rates. In order to reduce the impact of the epidemic, PBoC has already introduced many policy measures in terms of liquidity supply and other forms of interest rate reduction personal and corporate loans last month. Some forms of administrative measures like an extension of the bank’s payment and reducing interest payments were introduced.

Only when the March’s economic data comes out that China’s central bank can assess whether they can achieve the year's overall target; and then, to decide whether to cut the interest rates. Given China’s will-always-be cautious and sticking to reasonably level interest rates to keep its currency stability lubricating a dynamic economy, every rate cut or even increase is a long term decision. Therefore, the probability of cutting interest rates in March is low, unless there are special circumstances; especially now that the coronavirus spread is effectively contained in China.

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