MNI PBOC WATCH: Rate Cuts Eyed For Further Economic Momentum
MNI (BEIJING) - China will lower its reference lending rate further in 2025 as authorities aim to keep monetary policy accommodative to support Q4’s positive momentum, and despite the Loan Prime Rate holding steady on Monday.
The decision to keep the one-year LPR at 3.1%, and the five-year benchmark at 3.6% was largely anticipated. (See MNI PBOC WATCH: Jan LPR To Hold As Yuan Faces Pressure) Both rates fell in October by 25 basis points, the largest cuts since the reform of the new LPR pricing system in 2019, following the PBOC’s 20bp reduction of its 7-day reverse repo rate in September.
The easing guided down broad funding costs and helped boost the economy over Q4, which saw GDP grow 80bp higher than expected at 5.4% y/y and Q3’s 5.1%, pushing the economy to meet Beijing’s 5% growth target.
STRONG POLICY RESPONSE
Real-estate sales, durable goods consumption and urban infrastructure responded positively to the series of economic policies Beijing has implemented since Sept 24. However, domestic demand still requires further support, particularly amid potentially weaker exports this year.
Former officials told MNI the PBOC was likely to cut its benchmark 7-day reverse repo rate by as early as this quarter, and by about 40bp over 2025, which would help guide down LPR by about 50bp. (See MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials) The easing will help further stimulate local government and private-company investment, and household consumption, the officials argued.
NOMINAL GDP FOCUS
Rate cuts will also help address China’s weak inflation. The GDP deflator has printed negative for seven consecutive quarters, while the Producer Price Index (PPI) has also experienced a similar fate for the last 27 months. This has led nominal GDP to print at 4.2%, lower than the 5% real growth rate, impacting government revenue, corporate profits and household income.
Authorities are increasingly focusing on nominal GDP and inflation, rather than real GDP growth, according to officials, who argue the PBOC’s shift to an easing stance will boost inflation and help pull producer price inflation into positive territory, preventing further declines in stock and property markets.