Global banks scale back China rate-cut calls, see policy rate to be on hold this year
The country is holding up better than its regional peers amid the Iran war and the broader economy shows signs of rebound
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[SHANGHAI] Major global investment banks now expect China to keep its official interest rates steady this year, reversing earlier rate-cut calls. This comes as the effect of the Middle East conflict appears limited, even as Beijing maintains a loose policy stance.
The receding rate-cut expectations also come as China holds up better than its regional peers amid the Iran war, and the broader economy has shown early signs of a rebound.
Chen Xinquan, China economist at Goldman Sachs, said: “Against the backdrop of China’s relative resilience amid Hormuz disruptions, better-than-expected activity data in January to February, and the producer price index (PPI) likely turning positive in March, we (expect) no clear catalyst for a policy rate cut in 2026.”
“We therefore remove our call for a 10-basis-point (bp) rate cut in the third quarter from our baseline,” he added, while maintaining expectations for a 50 bps reduction in cash that banks must set aside as reserves.
While many other countries are grappling with higher inflation risks, China has faced deflationary pressure, giving it some leeway to counter inflation concerns stoked by rising oil prices.
The country is largely insulated from the energy supply shock because it has higher oil and gas reserves.
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“(The) Middle East conflict certainly had an (effect) on China, but it will be smaller than (that) on other countries,” said Ding Shuang, head of Greater China and North Asia economic research at Standard Chartered.
He added: “China has effectively ruled out the possibility of interest-rate cuts (for now), and there is no need for interest-rate hikes in the short term.”
On Tuesday (Apr 7), the US and Iran agreed to a two-week ceasefire.
China’s domestic policy response has been relatively restrained since the outbreak of the Iran war, aside from adjustments to retail petrol and diesel prices, market watchers said.
Meanwhile, China’s central bank has said that it will maintain an “appropriately loose” monetary stance this year, deploying tools including reserve requirement cuts and interest rates to keep liquidity ample.
The banking system has shown signs of abundant liquidity since the start of April, with the trade weighted overnight repo hovering at near three-year lows and the seven-day repo falling below the main policy rate.
“As the growth momentum is within the policy target, we no longer expect policy-rate cuts in both 2026 and 2027,” analysts at ANZ said in a note. REUTERS
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