PBOC’s rate decision sparks debate with economy in crisis

Bloomberg

The People’s Bank of China (PBOC) is leaving economists divided over whether it needs to cut interest rates for a second month to boost a faltering economy.
Sixteen of the 27 economists polled by Bloomberg forecast the central bank will keep the interest rate on its one-year policy loans unchanged on Tuesday, when it’s scheduled to conduct a monthly medium-term lending facility operation. Six of them expect a 10-basis point cut and another five see a 5-point reduction.
Another drop in the rate after last month’s 10 basis-point cut would be an aggressive step for the PBOC, signalling heightened concern about the growth outlook in a year when the Communist Party wants a stable backdrop to a crucial leadership meeting in the fourth quarter. Most economists argue though that the PBOC can afford to wait and see whether earlier easing measures are taking effect, with January’s strong expansion in credit seen as a positive signal.
“The government’s actions to stimulate borrowing demand is starting to deliver results, and market expectations for the economy are recovering under the proactive property, credit and fiscal policies,” said Ming Ming, head of fixed income research at Citic Securities Co. “There’s no need for the PBOC to cut interest rates further in the short term.”
The timing of a rate cut also hinges on the outlook for monetary policy in the rest of the world as major central banks like the Federal Reserve begin hiking rates, fuelling capital outflows in emerging markets.
The PBOC alluded to this concern in its quarterly report, suggesting it’s paying more attention to the actions of other central banks.
China’s economy remained under pressure at the start of the year, with early data signaling a moderation in manufacturing activity, sluggish holiday consumption as a result of fresh omicron virus outbreaks, and a further slump in property sales.
The National Bureau of Statistics won’t publish January and February official figures for major indicators like investment, retail sales and
industrial production until mid-March, due to seasonal distortions from the Lunar New Year holiday.
With the economy slowing and the central bank in an easing cycle, we expect more reductions this year. That said, we think the PBOC will refrain from aggressive easing in order to avoid inflating asset prices. We expect the PBOC to deliver its next cut in the MLF rate in 2Q or early 3Q.
The PBOC said in its report it will encourage banks to expand lending, reiterating an easing stance that analysts say suggests more rate cuts in coming months. The central bank said it will make monetary policy action “ample, targeted and front-loaded.”