China’s central bank yesterday refrained from cutting interest rates and injecting liquidity into the economy, disappointing analysts who had expected more forceful action to cushion growth from worsening COVID-19 outbreaks.
Its focus is shifting to a possible reduction in the reserve requirement ratio (RRR) for banks, a move that would give lenders cheap funding to spur loans and growth in the economy. The Chinese State Council hinted strongly on Wednesday of a reduction in the RRR.
The People’s Bank of China (PBOC) yesterday kept the rate on its one-year policy loans at 2.85 percent. Only six of the 22 economists surveyed by Bloomberg had predicted the decision, with a majority expecting a reduction of 5-10 basis points.
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The bank also refrained from injecting extra liquidity into the financial system, opting instead to roll over the 150 billion yuan (US$23.54 billion) of loans maturing in the medium-term lending facility. Economists had expected a net injection of 100 billion yuan.
Growth projections for China have been steadily downgraded this year and top officials have repeatedly warned about the deteriorating outlook as COVID-19 lockdowns spread. Economists now expect growth to slow to 5 percent this year, below the government’s target of about 5.5 percent.
While Beijing has pledged to step up monetary stimulus, it is facing a narrower window in which to do so as the US Federal Reserve and other central banks hike rates to combat soaring inflation.
Tighter monetary policy in the US has already wiped out China’s yield premium over US Treasuries, adding to capital outflow pressures and threatening the yuan.
“China’s monetary policy space is already limited, so it probably doesn’t want to use all of the stimulus tools within a short period of time,” Nomura Holdings Inc chief China economist Lu Ting (陸挺) said.
“Pressure is mounting on the PBOC to do more to spur lending, given continued supply chain snarls and the hit to activity from lockdowns in Shanghai and other cities,” Bloomberg Economics China economist David Qu (曲天石) said.
“Further out, we see the central bank cutting its key rate in May or June to support growth. We stick to the view that the PBOC will reduce the rate by another 30 bps by year’s end,” he added.
Market participants were anticipating a reduction in the RRR soon. Senior central bank officials on Thursday told a news conference that the tool would be used at the “proper time.”
“We think the central bank may follow up with a 50-basis point RRR cut today,” NatWest Group PLC China economist Liu Peiqian (劉培謙) said.
By refraining to cut interest rates, the PBOC might want to avoid “excessive easing that may fuel a renewed round of debt surge,” she added.
Lu said the bank might opt to cut interest rates this month or next month, after it reduces the RRR, predicting a 10-basis point reduction in policy rates by the end of the year.
The room for policy easing is limited, due to the Fed rate hikes, the need to protect commercial banks’ profitability and a worsening inflation outlook, he said.
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