MNI PBOC WATCH: PBOC to Hold Key Rates, But RRR Reduction Eyed

The People’s Bank of China will likely hold off further cuts to key interest rates, though another reserve requirement ratio reduction cannot be ruled out in Q3 should stimulus measures fail to boost the economy, economists and analysts said.

China's Loan Prime Rate was lowered Tuesday with the one- and five-year plus maturities reduced 10bp, the first cut since July 2022. The move was widely expected following the PBOC’s reduction to its 7-day reverse repo and medium-term lending facility rate early this month (see: MNI PBOC WATCH: MLF Rate Cut In Sight After Repo Move).

Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company, told MNI the LPR cut delivered a clear signal that the PBOC would make more efforts to stabilise the economy as the recovery has been slower than expected (see: MNI: PBOC Rate Cut Expectations Build After Deposit Cuts). The LPR reduction means corporate, mortgage interest and deposit rates will fall, supporting the real-estate market, consumption and investment, Dong commented.

Wang Qing, analyst at Golden Credit Rating International, said mortgage rates will fall more than the LPR. Last year, the 35bp cut to the five-year LPR led to a 129bp mortgage rate reduction, while the 15bp cut to the one-year LPR pushed corporate loans down 60bp, he noted. New loans will likely reverse their falling trend in June, supporting Q3 GDP performance, he added. The PBOC’s policy will add strength to ensure GDP growth near 6% for the year, he estimated.

STIMULUS MEASURES

Chinese Premier Li Qiang has called for policies to expand demand, boost the real economy and prevent risks in key sectors.

Ming Ming, chief FICC analyst at CITIC Securities and a former PBOC official, said the central bank may cut the RRR in Q3 and introduce new structural tools, while policy banks will likely strengthen credit supports, replacing some fiscal moves. Considering the four policy rate cuts since 2020, likely stimulus moves could include tax cuts, issuance of additional treasuries, infrastructure project launches and relaxation of property market restrictions, Ming said. He added the National Development and Reform Commission’s latest announcement on lowering funding costs stressed preferential tax policy for small, high-tech and key industrial companies.

Wang foresaw measures targeting consumption such as coupons and subsidies aimed at new-energy cars, intelligent appliance and green building materials. Local governments will accelerate issuance of special bonds and banks will launch products that support tourism and education. However, he also noted there was no need for excessive easing and the central bank will remain flexible and aim for balance between growth, inflation and risk deduction as the government’s GDP target will be met easily this year.