This is very good news. It is also quite encouraging that the CNB decided not to wait for a resolution on the budget, which had been the expectation in the market. The CNB had a regular meeting scheduled for Thursday. The fact that it held an extraordinary meeting on Monday raises some question marks. The latest cut in China has created sufficient room for a further reduction in renminbi rates of about 50 bps for deposits with maturities of one year or longer.
Lending rates are also likely to move down.
We do not expect the latest interest rate cut to have much of an impact on the economy. The deflationary environment is keeping real rates high. The main benefit of lower rates is to reduce the cost of financing the government's stimulatory fiscal policy, making this fiscal stance more sustainable into 1999. This is in line with the government's policy to match onshore dollar rates with offshore rates, which have trended down as the market has built in the latest and future Fed easings. Rates were last cut by 62.5 bps on September 23.