MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials
MNI (BEIJING) - The People's Bank of China is likely to cut its benchmark 7-day reverse repo rate by as early as next quarter, and by about 40bp over the whole of 2025, as well as to allow the yuan to gradually depreciate to compensate for any hit from rising U.S. tariffs, former officials told MNI following Monday’s significant shift in monetary policy stance.
The PBOC has room to ease both its policy rate and banks’ reserve requirements after the Monday’s politburo meeting announced a change in the setting of monetary policy to “moderate easing,” after 14 years of a “prudent stance,” the former officials said. (See: MNI INTERVIEW: PBOC To Ease Further In 2025)
“Moderate easing” has only previously been used from 2008 to 2010, when both the PBOC and fiscal authorities responded to the global financial crisis.
Authorities are increasingly focusing on nominal GDP and inflation, rather than real GDP growth, the officials said, noting that the GDP deflator has been negative for six consecutive quarters and that the PBOC is likely to increase support for consumption via relending tools and coordination with fiscal stimulus.
China’s stock, bond and forex markets all celebrated the shift in the PBOC’s policy stance and signals for bigger fiscal stimulus on Tuesday, with the yield on 10-year CGBs hitting a new low at 1.85%, down 5.6bp.
Earlier this year the PBOC insisted that it wanted a steeper yield curve, but now it seems to be tolerating the decline in long-dated yields as it shifts to policy easing, the former officials noted. Short-term rates are also falling due to purchases by both the PBOC and big banks, as controls on yields are relaxed.
RESERVE REQUIREMENTS
The Loan Prime Rate, based on a survey of commercial banks’ rates, is likely to be guided down by about 50 basis points over 2025, while reserve requirement ratios could be cut by 100bp, the former officials said, adding that big and medium-sized banks may be favoured for RRR reductions, given that their ratios are at 8.5% and 6.5% respectively, while some small lenders already report levels as low as 5%. The former officials did not rule out the possibility of a 25-50bp RRR cut very soon, as cash demand rises at year end. (See: MNI: PBOC To Expand Tools, Cut RRR As Fresh Bonds Hit Market)
The PBOC has reduced the RRR by 100bp so far this year, taking the weighted-average requirement to 6.6%. The 7-day repo rate has been eased by 30bp, helping to lower the loan prime rate by 35bp for the one-year maturity and 60bp for over five years.
The former officials agreed that narrowed interest margins and potential yuan depreciation still act as constraints on easing, but they expected the PBOC to continue to encourage banks to lower deposit rates, while regulating wholesale markets in order to limit their funding costs.
The PBOC capped interest rates on non-bank interbank demand and term deposits early this month, following concern among officials that deposit rates were falling too slowly despite monetary easing, squeezing banks’ net interest margins. Both retail and wholesale deposit rates have further to fall in order to allow the PBOC to ease without sparking concerns over financial system profitability, the former officials said.
YUAN
The central bank is also likely to take a more flexible approach to its management of foreign exchange markets, and could tolerate a gradual depreciation of the yuan should the dollar index remain strong or trade relations with the U.S deteriorate, they said.
A commentary from Xinhua News Agency said late on Tuesday that a "moderately loose" monetary policy entails reasonable growth in money supply, low interest rates, and an accommodative credit environment. This should ensure adequate liquidity and reduce overall financing costs for businesses and households, helping to channel more funds into areas such as technological innovation and consumer spending.