Among the multiple monetary policy adjustments announced Friday evening, the elimination of the deposit rate ceiling was symbolically important for China’s progress toward financial reforms, but the most significant for the credit impulse was the 50 bps cut in the required reserve ratio. The PBOC had remained cautious in cutting the RRR in the past because it would have accelerated pressure on the currency and forced additional intervention, but that concern seems to have softened at the central bank. Still, risks to the financial system may intensify as the currency remains largely a one-way bet and additional channels may open within the capital account.
