Tim Condon, Chief Economist at ING, reiterates their 1.00% mid-year forecast for the 1-year deposit rate (latest 1.50%, Bloomberg median 1.25%). Key Quotes “We interpret the across-the-board weakness in the February PMIs as evidence that delayed monetary easing contributed to a weakening of growth momentum in the first two months of 2016. The official manufacturing PMI, which fell for a second consecutive month to its lowest level since November 2011, has been below 50 for seven months. The non-manufacturing PMI is off to its weakest start in six years, though at 52.7 it still signalled expansion. We share the consensus view that the PBOC was delaying cutting the RRR and policy interest rate out of fear of a repeat of the market reaction to the last round of cuts, namely a blow-out in the USDCNH curve. However, by the end of February its exchange rate policy had eliminated the USDCNY-USDCNH basis, a situation last observed prior to the October 23 rate cuts. On February 29 the PBOC delivered, cutting the RRR by 50bp to 17%. We assume the authorities hope their exchange rate policy has calmed depreciation expectations sufficiently to free their hand for more aggressive easing, which the economy manifestly needs. The USDCNY-USDCNH basis is the easiest way to express CNY depreciation expectations. The PBOC fixed CNY slightly stronger this morning, ignoring the small overnight DXY rally and the offshore and onshore forward points have moved left, indicating reduced CNY/CNH depreciation expectations. We expect the PBOC to see the stable basis as a green light for a policy interest rate cut, which in light of persistent deep PPI deflation and contracting USD-value exports is sorely needed, in our view. We reiterate our 1.00% mid-year forecast for the 1-year deposit rate (latest 1.50%, Bloomberg median 1.25%).” For more information, read our latest forex news.