VIEW: J.P.Morgan: The Room For Policy Rate Cuts Has Diminished

J.P.Morgan note that “the PBOC may adopt an approach to lower market interest rates without cutting policy rates. Since April, money market rates have come down notably. For instance, the 7-day repo rate (DR07) fell from 2.21% on March 31 to 1.55% on May 13, and 3-month SHIBOR fell from 2.37% to 2.16% during the same period. In late April, banks reduced deposit rates by 10bp under the PBOC guidance, leaving the room for a possible LPR reduction on May 20 without an MLF rate cut.“

• “Given April activity data is much weaker than expected, the latest PBOC MLF decision was disappointing and reinforced our concern about policy under-delivery. We think the near-term urgency of growth pressure, as reflected in the activity data, will justify more aggressive easing of fiscal, monetary and industry policies. So far, the incremental policy support has mainly come from a stepped-up support for infrastructure investment. Over the weekend, the PBoC announced to lower the floor of first home mortgage to 20bps below the benchmark (5-Year LPR). While the zero-COVID policy and Omicron outlook are the predominant factors to affect economic dynamics, there are options for more aggressive policy support such as fiscal transfer to the household sector, supplementary fiscal budget, rate cuts and extra measures to stabilize the housing market. Nonetheless, the likelihood of rolling out these additional policy measures seems low in the near term, as exemplified in the PBOC’s MLF decision. We maintain our view that policy under-delivery will lead to significant under-shooting of the annual growth target this year.”