Central bank’s rate decision sparks debate

Further cuts: People walk past the headquarters of the PBoC in Beijing. Most analysts expect the central bank to cut interest rates by 10 basis points by the first half of this year. — Reuters

BEIJING: The People’s Bank of China (PBoC) is leaving economists divided over whether it needs to cut interest rates for a second month to boost a faltering economy.

Sixteen of the 27 economists polled by Bloomberg forecast the central bank will keep the interest rate on its one-year policy loans unchanged today, when it’s scheduled to conduct a monthly medium-term lending facility (MLF) operation.

Six of them expect a 10-basis point cut and another five see a five-point reduction.

Another drop in the rate after last month’s 10 basis-point cut would be an aggressive step for the PBoC, signalling heightened concern about the growth outlook in a year when the Communist Party wants a stable backdrop to a crucial leadership meeting in the fourth quarter.

A rate cut would also widen the policy divergence with major central banks like the United States Federal Reserve (Fed), which is now expected to hike interest rates at a faster pace than before.

A majority of economists argue that the PBoC can afford to wait and see whether earlier easing measures are taking effect, with January’s strong expansion in credit seen as a positive signal.

“The government’s actions to stimulate borrowing demand is starting to deliver results, and market expectations for the economy are recovering under the proactive property, credit and fiscal policies,” said Ming Ming, head of fixed income research at Citic Securities Co.

“There’s no need for the PBOC to cut interest rates further in the short term.”

The economy remained under pressure at the start of the year, with early data signalling a moderation in manufacturing activity, sluggish holiday consumption as a result of fresh Omicron virus outbreaks, and a further slump in property sales.

The National Bureau of Statistics won’t publish January and February official figures for major indicators like investment, retail sales and industrial production until mid-March, due to seasonal distortions from the Lunar New Year holiday.

With the economy slowing and the central bank in an easing cycle, there is an expectation of more reductions this year. That said, it is felt that the PBoC will refrain from aggressive easing in order to avoid inflating asset prices.

The PBoC is expected to deliver its next cut in the MLF rate in the second quarter or in the early third quarter.

The PBoC said in its quarterly report Friday it will encourage banks to expand lending, reiterating an easing stance that analysts say suggests more rate cuts in coming months. The central bank said it will make monetary policy action “ample, targeted and front-loaded.”

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc, said the most likely window for the next policy rate cut is April, after the first-quarter economic data are released.

Traders rushed to price in more rate cuts after the PBoC’s reduction in mid January, pushing China’s benchmark sovereign yields to the lowest since 2018 before they pared back some declines after the holiday.

The swap curve last week indicated no expectation of a cut to the one-year loan prime rate, the benchmark lending rate in the economy, over the next six months, according to Australian & New Zealand Banking Corp.

Those who predict a cut say it’s necessary for the PBoC to lower borrowing costs early to stimulate domestic demand and improve sentiment ahead of the annual legislative sessions in March.

And even though credit data last week showed a record amount of new loans issued by banks in January, economists like Citigroup Inc’s Yu Xiangrong and colleagues say growth in long-term household and corporate loans remained weak, suggesting demand is still sluggish and could do with a boost from rate cuts.

Aside from the interest rate, analysts are also watching to see whether the PBoC will inject more liquidity into the financial system or roll over the total of 200 billion yuan (US$31.4bil or RM131.7bil) of one-year MLF loans that mature on Feb 18.

The Fed’s move will also weigh on the PBoC’s outlook.

Rising bets of higher US interest rates have sent global yields soaring, while sharply reducing the yield premium of Chinese government bonds over US equivalents, threatening capital inflows.

Fed tightening could narrow the room China has for further interest rate cuts, Ming said.

Sheng Songcheng, a former central bank official, has also called on the PBoC to act quickly to take advantage of the time gap before the Fed begins hiking rates.

Most analysts expect the PBoC to cut interest rates by 10 basis points by the first half of this year, as well as to lower the amount of cash banks must hold in reserve in the first quarter by 50 basis points. — Bloomberg