BEIJING – China’s central bank is set to take more easing steps, pressured by a shaky economy that is undercutting jobs, but it faces limited room to manoeuvre due to worries over rising inflation and capital flight, policy insiders and analysts said.
Analysts now expect cuts in the country’s benchmark lending rates as early as Monday, after the People’s Bank of China (PBOC) unexpectedly lowered two key rates this week as data showed the economy unexpectedly slowed in July.
But the PBOC is walking a tightrope — seeking to support the COVID-ravaged economy while avoiding massive stimulus that could add to inflationary pressures and risk outflows from China’s struggling stock and bond markets, as the US Federal Reserve, and other economies, aggressively raise interest rates.
China’s economy narrowly avoided contracting in the second quarter amid widespread lockdowns and a deepening property crisis, which have badly damaged consumer and business confidence, and COVID cases have rebounded again in recent weeks. Nomura estimates 22 cities are currently in full or partial lockdowns, making up 8.8 percent of GDP.
“Currently, the main problem that China faces is slowing economic growth, safeguarding growth is the top priority,” Yu Yongding, an influential government economist who previously advised the PBOC, told Reuters.
“What we should do is to continue to adopt expansionary fiscal and monetary policy, including cutting interest rates,” he said.
China is likely to cut its benchmark lending rate for companies and home buyers, known as the loan prime rate (LPR), at its next setting on Aug. 22, policy insiders and analysts said.
Shortly before weak data was released on Monday, the PBOC unexpectedly cut the rate on its medium-term lending facility (MLF) for the second time this year, by 10 basis points. It also cut its reverse repo rate by the same margin. Both were already at record lows.(Full Story)
“The rate cut is not enough – we should step up easing,” said a government adviser who spoke on condition of anonymity.
However, the central bank is unlikely to cut banks’ reserve requirement ratio (RRR), a traditional tool to boost liquidity, any time soon, given the financial system is already awash with cash, China watchers said. – Reuters