(Bloomberg) -- China’s central bank is likely to cut a key policy rate and pump more cash into the financial system on Monday as it tries to counter deflationary pressures and boost lending to support the economic recovery.
The People’s Bank of China is expected to lower the rate on its one-year policy loans — called the medium-term lending facility — by 10 basis points to 2.4%, according to the median estimate in a Bloomberg survey of 15 economists. That would be the first trim to the rate since a surprise 15-basis-point reduction last August.
The PBOC is also seen injecting a net 121 billion yuan ($16.9 billion) through the MLF to boost liquidity and meet demand for funding.
“China’s economy has yet to stabilize,” said Woei Chen Ho, an economist at United Overseas Bank Ltd., adding that expectations for policy support have increased.
She expects measures are “likely to be front-loaded in January” as Chinese leaders spend the next several weeks gearing up for the National People’s Congress — the annual legislative session in March where the government’s official growth target for 2024 will be announced.
Investors are betting on looser monetary policy as the economy struggles to shake off some of the most persistent challenges to growth, from weak confidence to a property slump that has entered its fourth year. The International Monetary Fund sees gross domestic product growing 4.6% in 2024, slower than pre-pandemic levels.
A rate cut “may not have a notable impact on reviving demand, but will ease debt financing pressure,” said Michelle Lam, Greater China economist at Societe Generale SA.
Cutting the MLF rate and boosting liquidity are just a couple of options on the table for the PBOC, which recently consulted with several prominent economists about making its monetary policies more effective.
Separately, the head of the central bank’s monetary policy department hinted in an interview with state media this week that it’s considered trims to the amount of cash banks must keep in reserve to boost lending capacity and bolster credit.
Some economists don’t necessarily think the remarks from Zou Lan — who highlighted “reserve requirements” as one option to provide “strong support” for a reasonable growth in credit — mean a cut to the reserve requirement ratio for banks will come before a policy rate reduction.
But the comments did underscore how much room is growing for further easing.
Chinese government bond yields have fallen to the lowest level since April 2020, and major commercial banks cut their deposit rates last month — creating room for them to lower lending rates without further squeezing their profit margins. Official data to be released Friday is also likely to show consumer prices declined for a third straight month in December.
The Federal Reserve’s expected pivot to monetary easing, meanwhile, helped the yuan strengthen last quarter. As expectations for monetary easing grow, the PBOC on Thursday pushed backed against recent weakness in the currency by setting yuan fixing at strongest bias versus estimates since November.
“The need to dispel deflation expectations may outweigh the risk of a weaker yuan for the moment,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc.
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