The People’s Bank of China (PBoC) 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, Reuters reports, citing policy sources.
But the central bank is likely to cut market-based rates and further lower banks’ reserve ratios to boost credit growth and reduce firms’ borrowing costs, the report said.
“We cannot rule out a (benchmark) rate cut, but we still need to watch economic data for a few months,” a source told Reuters. “There is no sufficient reason for cutting benchmark rates if we look at the huge amount of new loans in January.”
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 percent 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.
More bank reserve ratio 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 program launched in January.
Sources told Reuters a benchmark cut may only happen if the economy slows abruptly and broad-based deflation emerges, but they expect stimulus measures will start to put a floor under economic growth around mid-year.
A trade deal between China and the US would also reduce the chance of a benchmark cut, sources said. Negotiators are racing to meet a March 1 deadline, and failure could lead to a sharp hike in US tariffs on Chinese goods.
A benchmark cut could also been seen as a setback in long-promised reforms to allow market forces to determine the cost of capital in China, which is key to producing more sustainable and higher quality growth and reducing inefficient investment.
“There are many tools in the central bank’s toolkit, and financing costs could fall as liquidity is ample and policy transmission mechanism improves,” a source told Reuters.
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