China’s central bank is likely to cut interest rates for the second time
The PBOC is also likely to reduce the RRR — the amount of cash banks are required to hold in reserve — after the State Council, China’s cabinet, strongly hinted at a cut on Wednesday and said it would lower the ratio “in due course.” The previous two RRR cuts in July and December last year came days after a similar signal from either the State Council or Premier Li Keqiang.
China’s growth forecasts are constantly being downgraded, and top officials have repeatedly warned about the prospects and stressed the seriousness of the situation. The government has promised further fiscal and monetary stimulus to boost the economy as its growth target of around 5.5% looks increasingly precarious.
“A rate cut should be seen as minimal help to the economy,” said Iris Pang, chief economist for Greater China at ING Groep NV.
Lockdowns and other virus control measures have led to logistical bottlenecks and the closure of factories at Volkswagen AG, iPhone maker Foxconn Technology Group and others. Spending on tourism and car sales have plummeted while food prices are rising. Economists are now predicting that economic growth will slow to 5% in 2022.
The State Council said on Wednesday it would “increase financial support to the real economy, particularly to industries and small businesses that have been hit hard by the pandemic.”
The central bank cut the rate on one-year policy loans — the medium-term lending facility — by 10 basis points in January.
The PBOC’s easing is in stark contrast to the US Federal Reserve, which has recently become more hawkish to combat rising inflation. That divergence means the PBOC will quickly run out of time for rate cuts, making an April move likely, many economists say. Aggressive Fed rate hikes would reduce foreign investors’ attractiveness to Chinese assets, fuel capital outflows and put pressure on the yuan.
China’s 10-year bond yield spread over government bonds disappeared earlier this week for the first time since 2010.
“This could be China’s last chance to embark on monetary easing in the near term before the Fed’s potential balance sheet shrinks,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. “China could do RRR cuts soon.”
The PBOC also has an opportunity to give banks a cash boost during their monthly liquidity operation on Friday. A total of 150 billion yuan ($23.6 billion) in one-year MLF funds mature this week. The central bank is likely to inject 100 billion yuan in net liquidity in addition to extending the amount due, according to the median estimate of nine economists polled by Bloomberg.
“We expect April’s MLF injection to be too large to reflect a likely acceleration in local government bond issuance and boost credit supply,” said Wang Jingwen, a macro analyst at China Minsheng Bank’s research unit.
More borrowing and faster inflation in March won’t stop the central bank from easing policy, economists say. The Covid outbreak may have further dampened the real economy and weakened credit demand in April, which economists at Citigroup Inc. led by Jin Xiaowen said required further monetary easing.
However, those not forecasting a change in interest rates argue that the PBOC will prefer to use other measures to boost growth.
“Money policy easing will be more in the form of credit easing as the PBOC assesses capital outflow risks amid Russia-Ukraine tensions and the Fed’s accelerated rate hike cycle,” said Jian Chang, chief China economist at Barclays Plc.
Domestic stagflation pressures from the global energy shock and supply shortages are also a concern, Chang added.
For more stories like this, visit bloomberg.com