MNI: PBOC Seen Holding Rates, But Reserve Ratio Cut Possible

The People’s Bank of China is likely to hold its policy rate unchanged over the rest of the year, though it could still reduce banks’ reserve requirements, economists and policy advisors told MNI, warning that any major easing could undermine the drive towards economic restructuring and boost bubbles in areas like AI.

A reserve ratio cut would depend on liquidity demand from local debt issuance and on whether the economy weakens noticeably in October and November, said Su Jian, professor at Peking University's School of Economics and director of the National Center for Economic Research. Razor-thin interest margins for banks and rising nonperforming loans following four years of property sector weakness also add to the case for a reserve requirement cut, said Lian Ping, director of the China Chief Economist Forum.

GDP growth is expected to remain low amid structural rebalancing, and room for rate cuts is limited, with banks’ net interest margins having just stabilised at 1.41%, said Su, predicting growth a bit higher than 4.5% this year, aligning with the target of 4.5%–5.0%. The resumption of Federal Reserve rate hikes has widened China-U.S rate spreads, and rising producer price inflation also limits space for lower rates, he added.

This year's Government Work Report explained that setting the growth target between 4.5% and 5.0% was mainly aimed at leaving room for structural adjustments, risk prevention, and reform, laying a foundation for better future development, Su said. Unlike past measures aimed at stimulating growth, policymakers now prioritise economic rebalancing, and have a degree of tolerance for a slowdown so long as it is not sharp, he said. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth)

Lian expected growth of about 4.6% for 2026, and of 4.6-4.7% in Q4, thanks to higher exports, support policies already implemented, and a low comparison base.

EASING CONSTRAINTS

Recent incremental policies including tweaks to structural monetary tools and mortgage subsidies have put a floor under infrastructure investment and stabilised the housing market, said Wang Qing, chief macro analyst at Orient Golden Credit Rating International. Policymakers need time to assess their impact, but additional measures to buoy export momentum, housing, consumption and investment are likely, to guarantee a smooth start to 2027, Wang said.(See MNI PBOC WATCH: Oct LPR To Hold As Targeted Easing Deployed)

The focus will be on channeling resources into high-tech manufacturing as China pursues self reliance in its race with the U.S., while avoiding blanket stimulus which might be diverted towards property and traditional infrastructure, he said. Officials are wary of encouraging excessive borrowing and wish to preserve policy headroom for external shocks or trade frictions.

Still, China’s cycle of policy expansion is far from over, though any further stimulus is likely to be measured, said Su, pointing to external volatility and the danger that over-rapid restructuring could trigger an excessive downturn.

The major support package unveiled in September 2024 has largely mapped out the policy envelope for the next three years, according to Lian, adding that major new stimulus on top of that is unlikely. It was centred around a CNY12 trillion local debt quota for de-risking, a substantial issuance of special sovereign bond issuance, and monetary easing.

Due to a lack of targeting, large liquidity injections provide limited real-economy traction and risk inflating asset bubbles, accumulating hidden hazards in the medium to long term, Lian added.

STRUCTURAL TOOLS

While the central bank has stressed the role of structural relending tools in supporting weak and key sectors, their use has been smaller than expected. The PBOC stopped revealing the volume of its structural tools in Q2 2025, when 10 facilities totalled CNY5.9 trillion.

Uptake for the facilities has been uneven, with private enterprise re-lending at about 76% quota utilisation, while consumer services and eldercare facilities lag, according to Su. Incentives remain marginal, he said, noting that the 1.25% relending rate differs little from the 1.2% paid on one-year deposits, while collateral-poor SMEs struggle with banks’ conservative risk controls. Making them work would require interest subsidies and credit guarantees, he added, though he noted that prolonged flows of targeted cheap money could also distort capital allocation and fuel overcapacity.

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University of China, said policy support should be more targeted toward sectors with real, pent-up borrowing appetite, such as eldercare, education, and healthcare.

MNI POLICY: Corp Expectations Data Key For Dec BOJ Decision

The direction of corporate inflation expectations in the December Tankan survey will be a key factor in the Bank of Japan Board’s decision on whether to raise the 1.25% policy rate at its Dec 17-18 meeting, MNI understands.

Bank officials are monitoring how the recent rise in crude oil prices and sluggish private consumption have affected companies’ medium-term inflation expectations. A December hike, which the market currently gives a 60% chance of occurring, will become more likely should the December Tankan show corporate inflation expectations resuming their upward trend, though other factors will also weigh in the decision. 

Bank officials believe medium-term corporate inflation expectations are not yet firmly anchored and remain alert to the risk that both upside and downside factors could influence them. 

SOFTER SEPTEMBER

The September Tankan showed companies expected annual consumer inflation to reach 2.6% in September, down from 2.7% in June. They also expected inflation of 2.6% three years ahead and 2.5% five years ahead, compared with record highs of 2.6% for both measures in June.

While the survey partly eased the BOJ’s concerns about higher underlying CPI inflation, officials do not consider the recent pause to be evidence expectations are firmly anchored. Input prices have eased, and supply chains have remained resilient despite prolonged tensions in the Middle East, which the survey may have failed to capture. 

MNI also reported this week the Bank will offer a strong signal to its hiking intentions within October's Outlook report, with any move away from a warning of upside risks making a December hike less likely. (See MNI POLICY: BOJ Unsure That Three More Hikes Needed)

MNI RBNZ WATCH: High Core Inflation To Drive Hike

The Reserve Bank of New Zealand is likely to raise its Official Cash Rate by 25 basis points to 3% on Wednesday, with core inflation above the Bank’s 1-3% target band and the OCR still below its estimate of the neutral rate.

A hike would be the third consecutive increase following September’s move, and return the OCR to its August 2025 level. (See MNI RBNZ WATCH: Breman Takes Cautious Stance On Further Hikes)

Markets assign an 88% probability to a hike and see the OCR peaking at 3.8% by September 2027, above the upper bound of the Bank’s estimated neutral range. Each meeting through to then carries about a 60% chance of a further increase.

Q3 INFLATION

Governor Anna Breman adopted a cautious tone on further tightening after September’s move, while other policymakers signalled the possibility of a pause. (See MNI INTERVIEW: RBNZ's Gai Sees Gradual Return To Midpoint) However, Q3 inflation data, particularly underlying measures, remains elevated, strengthening the case for another hike.

CPI excluding fuel rose 3.0% y/y, up from 2.9%, while CPI inflation excluding fuel and food accelerated to 3.2% from 2.9%. The 30% trimmed mean increased to 3.0% from 2.6%, while the weighted median rose to 3.1% from 2.7%. Higher international air transport costs, local authority rates and vegetable prices were the largest contributors to quarterly inflation, rising 14.3%, 6.2% and 10.5%. These increases were partly offset by lower fuel prices, with petrol falling 6.5% and other vehicle fuels and lubricants declining 15.5%.

The labour market remains weak and an unlikely source of inflationary pressure, and further hikes could dampen its recovery. But external factors, including the Middle East conflict and global oil prices, are the driving force behind price rises, while the weaker New Zealand dollar – which has declined between 2.5-4% against major currencies over the last two months – has also increased the risk of imported inflation. 

ECONOMISTS’ VIEWS

Former central bank officials and independent economists broadly agree the OCR is likely to rise further, with some arguing the rate needs to reach 4% or higher to contain inflation.

Former Assistant Governor John McDermott has consistently advocated for a higher OCR this year. While elevated diesel prices could weigh on economic growth, rising energy costs are adding to inflationary pressures, McDermott noted. “The world's awash with huge amounts of uncertainty and risk. So, things can change. But the immediate issue with energy prices is they're adding to inflation right now.”

But Michael Reddell, an independent commentator and former RBNZ special adviser, believes market expectations for the OCR remain too high, warning that elevated diesel prices could ultimately weaken economic activity. Reddell was less convinced that the neutral OCR was materially higher than before the Covid-19 pandemic. Weak productivity growth, subdued migration and modest nominal GDP growth instead pointed to a relatively low neutral rate closer to 3%, he argued.

“The Bank's nowcast was already revising down those growth estimates for later in the year,” he said, adding that he thought that the Monetary Policy Committee faced a difficult decision next week.

MNI INTERVIEW: UK Consumer Confidence 'Collapses' In Sep - GfK

UK consumer confidence slumped in October, sliding at a pace exceeded only in the immediate aftermath of the Covid pandemic, the head of a leading survey told MNI.

“There has been an extraordinary collapse in consumer confidence in October," with the pace of decline "alarming," Neil Bellamy, Consumer Insights Director at GfK, an NIQ Company, said in an interview.

GfK's Overall Index Score showed consumer sentiment down 11 points to -24 in October, with all sub-indices decreasing compared to last month.

"The last time we saw an 11-point drop was in July 2016, following the Brexit vote. In recent years, only the onset of the Covid pandemic saw a larger fall (down 25 points)," Bellamy noted. 

Recent sentiment indicators from S&P Global and the British Retail Consortium have also showed significantly weaker sentiment, as rising inflation, higher fuel costs, employment concerns, the prospect of an interest rate hike and pre-Budget unease weigh on household sentiment. (see MNI INTERVIEW: UK Wage Deals Look Capped At Around 3%- Attwood )

"Relentless cost-of-living pressures, against an international backdrop of unresolved regional conflicts that are themselves contributing to domestic inflation now at 3.5%, appear to have swept aside the nascent optimism we saw following the appointment of a new UK prime minister this summer," he said. (see MNI INTERVIEW: UK Consumer Enjoys July 'Burnham Bounce' - GfK )

"After three months of improving confidence, October is a sharp reminder of how quickly the public mood can switch," Bellamy added.

CONCERNS

No single major economic event has driven the decline, despite the upcoming budget, according to Bellamy. Weakness was seen across the full spectrum of income, age and gender.

"People are very worried; they are changing shopping habits; they are going without," he said.

While all measures were lower, the two largest decreases were in expectations for the wider UK economy in the coming year and the intention to make major purchases, both slumping by 14 points. These sub-indices are often seen as a leading indication of consumers’ willingness to part with their cash on the high street

The measures of personal finances, both looking back 12 months and ahead a year, were also down, by seven and eight points respectively. Analysts at GfK consider the look-ahead for personal finances as a clear indicator of the likely path ahead.

"Headline consumer confidence is now back to the level seen in April, May and June of this year and the summer’s buoyant mood has evaporated," Bellamy said. 

 

MNI: UK Welfare Reform Unlikely To Quickly Cap Benefit Bill

Tightening eligibility for the UK’s Personal Independence Payment, widely seen as a prime target for potential welfare cuts, would likely save less than GBP4.4 billion by 2029-30, a fraction of the roughly GBP20 billion rise in spending on the disability payment forecast by 2030-31, and cuts would be slow to implement in full, economists told MNI.

Chancellor of the Exchequer John Healey has signalled that he is looking at overhauling the UK’s welfare system, and the government has commissioned reviews into PIP, which is due to report this autumn, and into young people not in education, employment or training, for which a final report is due in November. Major welfare reform is not expected until after the Oct 28 budget.

Finding savings from PIP will not be easy, said Louise Murphy, senior economist at the Resolution Foundation think tank, which has links to the governing Labour Party.

The Resolution Foundation has estimated that tightening PIP eligibility so it is no longer paid to claimants whose disabilities cause them higher costs could save up to GBP4.4 billion by 2029-30. Murphy described this as an upper limit given administrative challenges. "In reality, it might be difficult to do all of those things in a couple of years, so it might be less than that," she said, adding that she doubted "there's anything that they could announce that immediately makes big savings." (See MNI INTERVIEW: UK Needs BOE Hike, Fiscal Squeeze Now - Chadha)

RISKS TO FORECASTS

She dismissed any suggestion that better targeting of payments or reductions in fraud could make savings of GBP10 billion or GBP20 billion.

"I think the evidence doesn't really support that," she said.

While this budget is not expected to include changes to welfare policy, welfare and PIP remain outsized risks to the fiscal forecasts. (See MNI BRIEF: Markets Underprice UK Welfare Reform - Ex-PM Advisor)

"The expectation would be the reviews come out this autumn, winter, and then in the next fiscal event in the spring next year ... it would be fleshed out into plans for government policy, with information about timelines and potential savings," Murphy said.

Murphy expects the review by former minister Alan Milburn into younger people not in employment to recommend some welfare cuts, but noted that he is also proposing quite large increases in spending in areas such as employment support and apprenticeships. It has already been reported that the costs of the "back to work" scheme for young people will exceed its savings through the end of the decade.

"It's just not necessarily clear that it's a net saving, at least in the first few years of the forecast," Murphy said. (See MNI INTERVIEW: UK Gov't Likely To Avoid Big Tax Hikes - IfG)

SLOW TO IMPLEMENT

Eduin Latimer, senior research economist at the Institute for Fiscal Studies, noted that it is not guaranteed that any reform would reduce government spending.

"The introduction of PIP was intended to save money, and ... later evaluation suggested that if anything, it costs more," he said in an interview.

The IFS noted that spending on incapacity and disability benefits (excluding Scotland) rose from 1.3% of GDP in 2019-20 to 1.9% in 2024-25, and that the OBR's March 2026 forecast has it reaching 2.2% by 2029-30. Separately, the OBR forecasts spending on disability benefits, across all ages, of around GBP65.5 billion in 2030-31, up from about GBP45.4 billion in 2025-26.

Latimer said the shift from Disability Living Allowance to PIP began in 2013 and some adults still claim it, so reform is "likely to take multiple years."

"Even with no policy change, it could well end up spending considerably more than current projections say ... I would definitely not consider an upper bound," he said. (See MNI INTERVIEW: UK's OBR Likely To Use Market Curve)

MNI: Italy To Win Partial Inflation Concession From EU-Sources

The European Commission looks set to only partially concede an Italian call for additional margin for spending under the European Union’s fiscal rules to account for higher rates of inflation due to the Iran war, European and Italian sources told MNI.

Rome is seeking an additional 0.6% of GDP in spending headroom, but Italian sources told MNI it was very unlikely to get anything close to that number and the concession would realistically be closer to 0.3%. Officials in Brussels would only say that the Commission would be likely to use to the maximum the flexibility already provided for in the 2023 revision of the bloc's economic governance framework.

In the spring, the Commission acceded to Italy’s earlier request to allow exceptional spending permitted under the National Escape Clause to include investment on energy, and not just defence. Rome also said that the Commission would allow it to use this margin for its 2027 budget despite its 2025 deficit being above the maximum allowed 3% of GDP, in return for promising a sub-3% budget in 2026, in another concession touted by Prime Minister Giorgia Meloni’s government as a victory.

The Commission is due to assess the country's progress in implementing its medium-term fiscal structural plan next month, with Italy arguing that this was calculated using an “outdated” structural inflation projection of just 1.8% while the country’s actual inflation has surged to 4.1%.

Italy says an adjustment is necessary to absorb the compounding effects of fiscal drag, a phenomenon where inflation artificially inflates nominal tax revenues — particularly through higher VAT receipts — while pushing citizens into higher tax brackets without any real increase in purchasing power. Without net expenditure flexibility, European rules would legally mandate that this inflation-driven revenue windfall be allocated exclusively to debt reduction. (See MNI: Meloni Tax Cuts Depend On EU Flexibility -Sources )

EUROPEAN FISCAL BOARD

The European Fiscal Board earlier criticised the National Escape Clause decision, arguing that frequent changes to the rules undermine the credibility of the framework as a whole. EFB member Eckhard Janeba told MNI that Meloni's new request should not be accommodated for the same reason.

"I am sceptical. Higher inflation pushes up certain expenditures that are indexed. At the same time, tax revenues tend to increase as well due to fiscal drag,” he said. 

On Oct 8, EU Economic Affairs Commissioner Valdis Dombrovskis told the Eurogroup meeting on Oct 8 that now was not the time to abandon Europe's hard-won fiscal credibility, with markets continuing to pressure European government bond yields higher. High-debt states particularly should stick to the multi-year spending commitments contained in their fiscal-structural plans approved by the Commission in 2024, he said. See MNI INTERVIEW: ECB Should Halt QT - Bini Smaghi)

But another Brussels source noted that Italy would be unlikely to be rebuffed entirely by the Commission.

"Experience teaches that they normally win some - if not a full concession - that they can sell as a political victory at home."

The EU's economic governance regulation allows the EU and Commission wide leeway when it comes to assessing a state's fiscal performance.

Mitigating and relevant factors can be taken into account when assessing whether a state already in an Excessive Deficit Procedure — as is the case with Italy — has taken "effective action" to bring its deficit down and to put its debt on a sustainable path.

FINAL REMINDER: MNI Connect VC with CBO Swagel At 1000ET

You are invited to listen to a livestreamed MNI Connect Video Conference with the Congressional Budget Office, Phillip Swagel.

Details below:

• Speaker: Phillip Swagel, Director of the Congressional Budget Office.
• Topic of discussion: ‘The U.S. Budget and Economic Outlook’
• Date: Thursday, 22nd October 2026, 10 am to 11:30 am ET / 3 pm to 4:30 pm London time.
• This event will be run as a Zoom Webinar and is a public, on-the-record event.

To register please go to: MNI Webcast Registration