MNI PBOC WATCH: Easing Paused Ahead Of Two Sessions
MNI (BEIJING) - The People’s Bank of China will hold its easing pace steady, as recent economic indicators point to recovery and it awaits further guidance from March's annual Two Sessions meeting, which will likely deliver further signals and set fresh targets to support the economy.
The one-year Loan Prime Rate remained unchanged on Thursday at 3.1% and 3.6% for the five-year and over tenor as widely expected. (See MNI PBOC WATCH: China Feb LPR To Remain Stable) Both rates last fell in October 2024 by 25 basis points, the largest cuts since the reform of the new LPR pricing system in 2019, following the PBOC’s 20bp reduction on its 7-day reverse repo rate the month prior.
China's premier legislative body the National People’s Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) advisory body will host the nation's top policy event next month, with several yearly economic targets – such as GDP, inflation, the deficit-to-GDP ratio and the local-debt quota – set on March 5. Investors expect the Two Sessions meeting to reveal stronger fiscal and monetary plans to ensure 5% GDP growth this year as the country faces poor domestic demand and uncertain external trade.
INFLATION TARGET
China is expected to lower its CPI target to 2% from the 3% set two decades ago due to the increased focus on deflation risk. Policy advisors have called on Beijing to prioritise 2% inflation over the GDP target to help guide monetary policy, improve market expectations and boost demand, while the PBOC should signal its intent to keep policy loose until it meets the target. (See MNI: China To Lower 2025 CPI Goal As Deflation Pressure Looms)
However, China will still find achieving the 2% target challenging, as consumption and investment remain soft, several industries struggle with oversupply and efforts to boost incomes lag.
GREEN SHOOTS
Economic indicators, including loan growth and home sales, showed positive signs of improvement recently, which may help soften deflationary pressure.Advisors and analysts told MNI housing markets in China’s first-tier cities were likely to stabilise within the year, supported by further reductions in home-buying thresholds and restored confidence as local governments work to ease a liquidity crunch for high-quality real-estate developers.
However, lenders will find it difficult to reduce mortgage rates in the near term due to net interest margins that have dropped to record lows, they noted.