PBOC sees benchmark rate cut as last resort, may use other tools
BEIJING: China’s central bank is not yet ready to cut benchmark interest rates to spur the slowing economy, despite cooling inflation and a stronger yuan, which have fanned market expectations of such a move, policy sources told Reuters.
But the People’s Bank of China (PBOC) is likely to cut marketbased rates and further lower banks’ reserve ratios (RRR) to boost credit growth and reduce firms’ borrowing costs, according to the sources involved in internal policy discussions.
“We cannot rule out a (benchmark) rate cut, but we still need to watch economic data for a few months,” one said. “There is no sufficient reason for cutting benchmark rates if we look at the huge amount of new loans in January.”
China’s trading partners and major central banks are increasingly concerned over how quickly the world’s second-largest economy is decelerating and much it will drag on global growth.
Premier Li Keqiang reiterated on Wednesday that China will not resort to “flood-like” stimulus like that unleashed in past downturns. But after a spate of weak data, investors are asking if Beijing needs to speed up or intensify support to reduce the risk of a sharper slowdown.
Analysts polled by Reuters expect China’s official growth rate to cool to 6.3 per cent in 2019, a 29-year low, and some believe real activity levels are already much weaker than government data suggest.
But China watchers note the PBOC has many policy tools to choose from before wielding blunter instruments such as a lending rate cut, which would lower financing costs across the board but risk adding to a mountain of debt.
We cannot rule out a (benchmark) rate cut, but we still need to watch economic data for a few months. People’s Bank of China
More RRR cuts have been expected in coming quarters after five in the past year, most recently in January.
The PBOC has also been guiding money market rates lower in various ways, and offered a slightly better rate on a new medium-term lending programme launched in January.
The PBOC did not immediately respond to Reuters request for comment.
In one sign that recent policy loosening measures may be starting to be felt, China’s mostly state-backed banks doled out a record 3.23 trillion yuan (US$480.43 billion) in loans in January, following months of urging by the PBOC to keep financing open to cash-strapped companies.
But the PBOC was quick to say after the data that it has not opened the credit floodgates.
Analysts note there is a time lag before a jump in lending will translate into growth, suggesting business conditions may get worse before they get better.
But the government is also planning to step up fiscal stimulus ranging from more infrastructure spending to sweeping tax cuts, building on moves last year.
In the last downturn in 20142015, China cut the benchmark six times. But it has kept the benchmark at 4.35 per cent since October 2015 while the central bank focuses on building a more market-based regime that will get funding to parts of the economy that need it most.
Only a handful of analysts have predicted a benchmark cut this