JPM: PBOC Rate Cut Was Desirable, But Perhaps Of Secondary Importance

In the wake of today’s rate cuts from the PBoC J.P.Morgan note that they “have argued that it is desirable for the PBoC to cut policy rates, against the backdrop of below-trend growth, weak labor market condition and low core CPI inflation. Nonetheless, the concerns about rising headline CPI inflation (to 2.7% Y/Y in July and will most likely exceed 3% in the next few months), an accelerated pace of rate hikes by most other central banks and capital outflow pressure have made the PBoC reluctant to cut policy rates. Indeed, the PBoC Monetary Policy Operations Report released last week did not hint on policy rate reduction.”

• “A likely trigger for the unexpected policy move is weak credit report in July (released last Friday). Also, July activity data released today is broadly weaker than expected. These jointly point at soft domestic demand.”
• “How effective is the policy rate reduction? It is a desirable move, but the policy impact will depend on whether the government is able to mitigate the uncertainty associated with zero-COVID policy and Omicron outlook (a predominant factor behind weak incentive for investment and consumption), whether prompt actions can be taken to address the housing market weakness and an anticipated fiscal funding gap into Q4. To that extent, monetary policy is an important component, but perhaps of secondary importance in the current environment.”