PBOC likely to cut policy rate as UK votes to leave EU

The People’s Bank of China (PBoC) is expected to advocate another additional cut in the reserve requirement ratio, in reaction to Britain’s withdrawal of its membership from the European Union. Although the Brexit result is unlikely to affect China's immediate economic outlook, the event pencils in one additional cut in the reserve requirement ratio (RRR), ANZ reported.

China will exercise both its conventional and unconventional monetary policy tools. Premier Li Keqiang visited the PBoC on 20 June and he stated China should maintain its current monetary policy stance. China is further, expected to exhibit its status as a global citizen and signal its willingness to lift market sentiment due to Brexit.

The PBoC Friday, injected net RMB130bn via open market operation (RMB170 billion issuance compared to 40 billion maturities), which is more than market expectation. Today’s 7-day repo covers the upcoming quarter end and good demand for the repo is seen which should be mainly from non-bank financial institutions who are preparing for the macro prudential assessment (MPA), ANZ reported.

Market liquidity in China is expected to tighten as tax period is nearing, with July 5 the day for another reserve requirement submission.

"This weekend provides a good window for the PBoC to take monetary policy action to manage the market sentiment," ANZ commented in its research report.