PBOC Signals More Easing as Analysts See RRR, Rate Cuts

China’s central bank signaled more monetary easing is on the cards, as it seeks to support growth while also safeguarding the stability of the yuan.

(Bloomberg) — China’s central bank signaled more monetary easing is on the cards, as it seeks to support growth while also safeguarding the stability of the yuan. 

The People’s Bank of China vowed to “step up macroeconomic policy adjustment” in its quarterly monetary policy report published Thursday, largely reaffirming its supportive policy stance. The central bank also pledged to prevent excessive movement in the yuan, which is sliding toward its weakest level since 2007.

The report likely foreshadows further easing from the central bank to support growth in an economy that is struggling to overcome weak demand and confidence. Loans plunged last month to a 14-year low and the economy has flashed other warning signs on deflation, softening consumer spending and waning investment.

The PBOC this week cut a key policy rate earlier than many economists expected, suggesting concern over the state of the economy. Analysts now see the central bank taking additional steps such as cutting the reserve requirement ratio, or the amount of cash banks have to keep in reserve. Policymakers can also trim policy interest rates further or deploy more structural tools.

The central bank’s language shows “monetary policy support for growth will likely keep being strong,” Zhao Wei, chief economist at Sinolink Securities Co., wrote in a report Friday. 

The PBOC may wait at least until next month to revise the RRR: The central bank has never cut the reserve ratio and the rate on its medium-term lending facility in the same month since the latter was introduced in 2016.

The need to increase liquidity also may have faded, given the PBOC’s moves this week to roll over maturing policy loans and make a large net injection of funds during its daily open-market operations. 

What Bloomberg Economics Says … 

“The People’s Bank of China’s powerful push-back against the yuan’s fall — with the most forceful daily fixing on record Friday — shows it’s uncomfortable with a speedy decline, but probably not depreciation itself. A weak yuan won’t prevent the PBOC from cutting rates further — we see two more cuts coming this year.”

— Chang Shu, chief Asia economist

Read the full report here.

Goldman Sachs Group Inc. economists expect the PBOC to cut the RRR by 25 basis points in September, they wrote in a note Thursday. They also see the central bank lowering the RRR again by the same magnitude in the fourth quarter, as well as reduce policy interest rates by another 10 basis points then.

Citigroup Inc. economists also see a 25-basis point cut in the RRR coming some time soon. 

Other measures include potential moves by state banks to lower deposit rates, which may relieve profitability pressures. Reductions in the rates on existing mortgages may also ease the debt burdens carried by households. 

In a special section of its quarterly report, the PBOC highlighted a need to maintain “reasonable profits and net interest rate levels” for banks, so they can serve the real economy. That language may suggest lower deposit rates going forward, along with a 25 basis point-cut in the RRR by the end of next month, according to Shenwan Hongyuan Group analysts. 

The central bank also pledged to optimize property policies. It noted that 100 out of China’s 343 prefecture-level cities have lowered or removed the floor on mortgage rates for first-time buyers. The average new mortgage rate dropped to a record low of 4.11% in June. 

The Citi economists also expect other easing measures such as lowering down-payment ratios, removing some home-purchasing restrictions in big cities and cutting outstanding mortgage rates. 

Banks are likely to lower the loan prime rates — their benchmark lending rates — on Monday following the PBOC’s surprise rate cut this week. The one-year rate is seen dropping by 15 basis points to 4.05%. The five-year rate, a reference for mortgages, could fall by 10 or 15 basis points, according to a Bloomberg poll of economists.

Another concern for the central bank is the yuan, which is also facing pressure as the interest-rate gap between the US and China widens. 

The PBOC has worked recently to bolster the currency by setting stronger-than-expected daily reference rates, including the most forceful fixing ever on Friday. Authorities also told state-owned banks to step up intervention in the currency market this week, and are studying other ways to prop up the yuan, Bloomberg News has reported.

In its report, the central bank said it will resolutely prevent “over-adjustment” in the yuan, which it said has yet to deviate from its fundamentals. The PBOC added that it has ample policy tools to safeguard a stable foreign exchange market.

(Updates throughout.)

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