Central Bank Report Sparks Speculation on Interest Rate, Reserve Requirement Cuts

The headquarters of the People’s Bank of China in Beijing. Photo: IC Photo

Analysts are speculating about whether or not China will cut interest rates or lenders’ reserve requirements in the coming months, as the central bank warns of inflation in its second-quarter monetary policy report.

The People’s Bank of China (PBOC) said in the Monday report (link in Chinese) that domestic inflationary pressure is generally controllable, but warned that there could be a spillover from ultra-loose monetary policies overseas. The PBOC will closely monitor the situation and ensure prices remain basically stable, read the report.

A cut to banks’ reserve requirement ratio (RRR) or policy interest rates is unlikely in the second half due to these inflation concerns, unless the State Council calls for such action, analysts at Citic Securities Co. Ltd. (600030.SH) wrote in a Tuesday note (link in Chinese).

But some other analysts took the opposite view, citing the country’s unbalanced and unstable economic recovery. The economy will face pressure in the second half and even more in the following year, analysts at Guosheng Securities Co. Ltd. wrote in a note (link in Chinese). They say that another RRR cut is more likely than a reduction of interest rates, while analysts at Haitong Securities Co. Ltd. (600837.SH) hold a similar perspective (link in Chinese).

Last month, the PBOC lowered the RRR for banks by 50 basis points, leaving them with more money available to lend to businesses.

Economic indicators have shown signs of weakening. China’s manufacturing sector expanded at its slowest pace in 15 months in July as new orders dipped, a Caixin-sponsored survey showed. Goods exports, a major driver of the recovery, rose at a slower pace in the month than in any of the previous six.

A number of economists said recent measures implemented to counter China’s scattered local outbreaks of the delta variant of the new coronavirus would be another blow to offline consumer activity, putting further pressure on the economic recovery. Last week, Nomura International (Hong Kong) Ltd. revised down its forecasts for China’s year-on-year GDP growth to 5.1% and 4.4% for the third and fourth quarters from 6.4% and 5.3%.

Although it is necessary to guide national loan prime rates (LPRs) downward through cutting policy rates, the PBOC has to choose its moment carefully given the high producer inflation and expectations of a shift in U.S. monetary policy, said Feng Xuming, a researcher at state-backed think tank the Chinese Academy of Social Sciences. If it is difficult to find the right time for a rate cut, the PBOC can choose to adjust supply and demand in the money market instead in order to guide market interest rates downward, he told Caixin.

National LPRs are the de-facto interest benchmark for bank loans. Both the one-year and five-year-plus rates have been unchanged since last April.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

Download our app to receive breaking news alerts and read the news on the go.

Get our weekly free Must-Read newsletter.