MNI PBOC WATCH: Easing On Hold As Marginal Recovery Signs Show

The People’s Bank of China is likely to pause rate cuts in the first quarter as leading economic and price indicators show marginal improvement following new measures to boost consumption and investment, while awaiting fresh stimulus signals from the national parliamentary meeting in March.

The Loan Prime Rate was held steady on Tuesday for the eight consecutive month, with the one-year tenor left at 3.0% for the one-year maturity and 3.5% for the five-year tenor. Both rates were cut by 10 basis points in May after the PBOC lowered its benchmark seven-day reverse repo rate by 10 basis points to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio on May 15. (See MNI PBOC WATCH: Jan LPR To Hold On Structural Rates Cut)

The LPR decision was largely expected, as the central bank’s recent cut to interest rates on its structural relending tools reduced the likelihood of near-term across-the-board easing. At the same time, improving macro data and recent policy initiatives – including new fiscal quotas to subsidise consumption and plans to support investment – are expected to shore up first-quarter growth following the economy’s 4.5% year-on-year expansion in Q4. 

With weighted average interest rates on new corporate and individual housing loans already at historically low levels, further reductions in the LPR are not seen as a near-term priority. Policy advisers noted that as market interest rates continue to decline, the marginal impact of additional rate cuts is diminishing, limiting their effectiveness in stabilising growth or stimulating consumption.

Further policy moves are likely after the National People’s Congress convenes on March 5, when authorities are expected to set targets for 2026 and unveil additional measures to support the recovery and key sectors, advisers said.

RECOVERY SIGNS

Signs of a tentative recovery have emerged in activity indicators. The official manufacturing PMI and the private-sector RatingDog PMI both rose above the 50-point expansion threshold in December, pointing to an earlier-than-expected stabilisation, Yao Yu, a senior economist and ratings expert, recently told MNI. The recovery was driven by modest improvements in supply and demand, helping to offset pressure from external uncertainties, he added. (See: MNI INTERVIEW: China PMI Rebound Signals Fragile Recovery)

Improving price dynamics have further reduced the urgency for easing. PBOC Vice Governor Zou Lan said last week that positive changes had emerged in inflation, noting that CPI rose 0.8% year-on-year last month – the highest reading since March 2023 – while core CPI increased 1.2%, marking the fourth consecutive month above 1%.

Zou cautioned that the central bank has been closely monitoring price trends, noting that years of ample liquidity have led aggregate financing growth to outpace nominal GDP significantly, raising potential inflation risks.

In the near term, producer prices may continue to recover faster than consumer prices, Yao said, citing RatingDog’s December PMI, which showed average input prices rising for a sixth straight month, even as manufacturers continued to cut output prices to boost sales and clear inventories.