MNI PBOC WATCH: Further Easing On Hold As Economy Stablises

The People’s Bank of China is likely to hold off from further monetary easing and focus on implementing existing policy measures unless the domestic economy or U.S.-China trade talks deteriorate in the second half of the year. 

On Tuesday, the Loan Prime Rate (LPR) was cut by 10 basis points, with the one-year rate set to 3.0% and the five-year-plus benchmark reduced to 3.5%, in line with expectations. (See MNI PBOC WATCH: LPR To Fall 10bp On Lower Key Rate) This followed the PBOC’s earlier move on May 8 to cut the 7-day reverse repo rate – its benchmark policy tool – by 10bps to 1.4%.

In the near term, the easing of U.S.-China tariff tensions, along with recent policy moves such as cuts to the reserve requirement ratio and benchmark rates, is expected to support Q2 GDP growth at a relatively high level of around 5%. This reduces the immediate urgency for additional rate cuts and could delay further adjustments to the LPR.

POLICY PRIORITIES

The PBOC’s Q1 Monetary Policy Report signalled a subtle shift in policy priorities, emphasising the need to “support the economy while maintaining the health of the banking system,” thereby underscoring the importance of stabilising interest margins and ensuring the sustainable operation of financial institutions.

A former member of the PBOC's monetary policy committee told MNI that the central bank remains cautious about aggressive rate cuts, fearing they could destabilise the banking sector, particularly as major state-owned lenders experienced revenue declines in 2024. (See MNI: Low Credit Demand Feeds PBOC Easing Caution; Tariffs Key) 

On Tuesday, the four major state-owned banks announced deposit rate cuts, with reductions of up to 25bp, aimed at relieving pressure on their interest margins. The five-year LPR cut is also expected to lower mortgage rates and support the struggling property market, which faced renewed headwinds in April.

Analysts noted that the ongoing U.S. tariff conflict contributed to April’s housing market slowdown, particularly in export-reliant cities, as market confidence weakened and income expectations fell. Yan Yuejin, vice president at E-house China Research and Development Institution, said local governments are likely to continue reducing homebuying costs gradually, including offering preferential loans with lower monthly payments to attract young and skilled talent.