The People's Bank of China's (PBoC) surprise cut to the reserve requirements of major banks is the latest sign of its shift towards more aggressive monetary easing, say economists who expect a lot more action in the coming months.
"A full RRR cut is generally viewed as the most blunt tool in the monetary policy tool box," Yu Song, economist at Goldman Sachs wrote in a note. "It sends a very strong signal of policy loosening."
Late Wednesday, the PBoC reduced the amount of cash that banks are required to hold as reserves by 50 basis points to 19.5 percent. The move, effective Thursday, is the first such cut since May 2012.
The cut is estimated to unlock 600-650 billion yuan ($96-104 billion) in liquidity, which analysts say will help counter the tighter liquidity from the recent capital outflows.
"This will provide a boost to confidence, which is likely positive for short-term demand growth, and should also help reduce the risks of a protracted period of undesirably low inflation," Song said.
After growing at its slowest pace in 24 years in 2014, China's latest economic data point to a continued loss of growth momentum in the new year.