(Yicai) Sept. 6 -- There is still room for the People's Bank of China to lower the reserve requirement ratio, but deposit and interest rate cuts remain unlikely, according to the central bank's monetary policy department.

The average RRR for financial institutions is about 7 percent, indicating that adjustments are still possible, Zou Lan said at a press conference yesterday. However, the PBOC is facing some constraints in cutting interest rates because of the speed at which deposits are diverted to asset management products and the narrowing of banks' net interest margins, Zou added.

M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 6.3 percent in July from a year earlier, remaining under 7 percent for the third consecutive month. M1, a narrow measure of money supply that covers circulating cash and non-bank and non-government deposits, fell 6.6 percent. New Chinese yuan deposits shrank by CNY800 billion (USD113 billion).

These data show an accelerated deposit outflow and a rapid decline in bank loans, said Liu Tao, a researcher at the research institute established by Guangzhou Development District Holding Group and the China Chief Economist Forum. It is urgent for monetary authorities to cut the RRR and inject liquidity into the banking system, Liu added.

Chinese small lenders' average RRR is around 5 percent, which leaves limited space for short-term reductions, Liu noted. Meanwhile, the average RRR for medium-sized and large banks are 6.5 percent and 8.5 percent, respectively, indicating that there is still some room for cuts.

The lower limit for the RRR may be 5 percent, according to Wang Qing, chief macro analyst of Golden Credit Rating International.

China's one-year and five-year loan prime rates have been trimmed by 0.1 and 0.35 percentage points, respectively, this year, which led to a continuous decline in loan interest rates.

China needs to further lower its interest rates because they are still relatively high, Liu said, adding that the imminent interest rate cuts by the Federal Reserve also open a window of opportunity for China to follow suit.

Based on the effects and market reactions of previous interest rate cuts, China should implement a relatively substantial interest rate cut of around 50 basis points by the end of this year or the beginning of next year, Liu believes.

Editor: Futura Costaglione