Analysts see less room for China rate cuts after 'conservative' RRR cut

THE smallness of a cut to the amount of money Chinese banks must hold in reserves may reflect concern by the Chinese central bank over inflation and US monetary tightening, making further interest rate cuts less likely, analysts say.

The People's Bank of China (PBOC) on Friday (Apr 15) announced a 25 basis point (bp) cut to banks' reserve requirement ratio (RRR) from Apr 25, releasing about 530 billion yuan (S$113.3 billion) in long-term liquidity. It said that the move would help banks support industries and firms affected by surging Covid-19 cases.

While the cut was widely expected, it was smaller than the usual 50 or 100 bps cut and came after the central bank left its medium-term lending-facility rate unchanged while rolling over maturing loans on Friday.

Goldman Sachs analysts identified what "appeared to be the key considerations behind this more conservative move". The PBOC seemed to be concerned about spillover effects as other countries raised interest rates, they wrote. Other analysts have pointed to one such spillover: drawing capital away from China, which a Chinese rate cut would exacerbate.

Also, Goldman Sachs analysts said, the PBOC seemed to be concerned that cutting interest rates would not have much effect on an economy in which credit demand was weak and the outlook for inflation uncertain.

Since such concerns were unlikely to abate soon, the analysts no longer expected a cut in the central bank's policy rate or a further RRR cut. They added that a cut on Wednesday in the loan prime rate, the benchmark for corporate and household lending, was unlikely.

Policymakers might be more inclined to boost growth with more fiscal measures and targeted easing through relending and rediscounting, they said.

Analysts at Citi said a small 5 bps cut to the 1-year loan prime rate on Apr 20 remained possible, but that policymakers would prioritise credit expansion over interest rate reductions.

A top Chinese regulatory body is encouraging some banks to lower deposit rate ceilings, two sources with direct knowledge of the matter said on Friday. REUTERS

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