ABN Amro Expects PBoC To Make “Mini” Rate & RRR Cuts

The mixed picture continued in May for China’s economy with the property sector very weak, IP disappointing but retail sales recovering. The PBoC left the 1-year medium-term lending facility rate unchanged at 2.5%. ABN Amro continues to forecast the central bank to ease moderately in the months ahead to support “sluggish domestic demand”.

• ABN Amro expects “the PBoC to come with further (mini) policy rate cuts and RRR cuts in the coming months to help prop up sluggish domestic demand, also given the still subdued pace of inflation. This would also be in line with what has been signaled recently in official statements. Still, with Fed rate cut expectations having been delayed and the yuan still at relatively weak levels versus USD, consensus expectations including ours was for the PBoC to wait for another month or so. “
• “Now that the PBoC kept the 1-yr policy rate on hold today, we also expect the 1-year loan prime rate to be maintained at 3.45% coming Thursday – in line with consensus.”
• “On balance, the data confirmed that China’s recovery is still quite unbalanced and hampered by headwinds, particularly from ongoing property weakness.”
• “The most eye-catching outcome was for retail sales, which accelerated to 3.7% yoy (April: 2.3%). In monthly terms, retail sales picked up to 0.5% mom (April: 0.1%). That said, these numbers were boosted by a long holiday in May, and may be followed by payback later on, so it’s too early to be too enthusiastic about these numbers.”
• “Property sector data remain lacklustre, with both investment and housing sales still deeply in contraction territory and both new/used home prices dropping at a relatively steep monthly pace.”