Calls for China to cut rates grow louder as economic risks grow

[SHANGHAI] Expectations of an interest-rate cut in China are increasing after authorities pledged to ensure economic stability this year.

The People's Bank of China could lower the cost of medium-term loans - a key policy rate - as soon as next week, according to Scotiabank currency strategist Qi Gao. He predicts a 5 to 10-basis point reduction from 2.95 per cent, which would be the first cut since April 2020.

Strategists at Australia & New Zealand Banking Group say the one-year rate "seems too high," without specifying when a cut could happen. BNP Paribas economists and DBS Bank have also flagged the possibility.

China's central bank fuelled speculation it will ease monetary policy sooner rather than later with its vow in December to take "proactive" action.

Fresh pandemic outbreaks and lockdowns add to challenges for an economy already grappling with weak private consumption and a property market slowdown.

Looser policy contrasts to the US, where traders now expect the Federal Reserve will hike rates four times this year.

China's policy shift became evident in early December. President Xi Jinping oversaw a meeting of the Communist Party's Politburo that concluded with a signal of an easing on real estate curbs - a key overhang for the economy.

The PBOC then lowered the amount of cash banks needed to hold in reserve, adding liquidity to the financial system. Chinese banks followed with a cut to their key lending rate in December for the first time in 20 months.

The PBOC is likely to publish results of its monthly medium-term loan operation on Jan 17, the same day the government will release data showing the economy likely slowed to 3.6 per cent in the fourth quarter, according to a Bloomberg survey of economists. That would be the weakest pace since the second quarter of 2020.

Not everyone is calling for a policy rate cut. For Goldman Sachs Group's China economist Hui Shan, it depends on whether credit growth data shows weak demand, she told Bloomberg Television earlier this month.

Standard Chartered says China is unlikely to be too aggressive in a Fed-tightening cycle due to risks of volatility in emerging markets. "It has historically been very rare for the PBOC to be cutting rates while the Fed is hiking - the last one was more than 20 years ago in June 1999," said Becky Liu, head of China macro strategy at Standard Chartered.

BLOOMBERG