‘Too little, too late’: China’s interest rate cut prompts more moves

China’s surprise interest rate cut has done little to quell concerns over housing and the slowdown caused by Covid Zero, with economists and state media calling for additional stimulus .

In an article on Tuesday, central bank-backed Financial News said Beijing should introduce new growth-friendly policies at the right time to keep growth within a reasonable range, citing Wen Bin, chief economist at China. Minsheng Bank. The Securities Times said in a separate report that the People’s Bank of China’s surprise rate cut could be the first in a series of moves to stabilize growth.

Nomura Holdings Inc.’s Lu Ting, who described Monday’s 10 basis point cut as “too little, too late,” said even a likely cut next week in the prime lending rate, the de facto reference loan, would not suffice. much to stimulate demand for credit. Ping An Securities Co.’s Zhong Zhengsheng says that while monetary policy support has reached the scale of what was rolled out in 2020, there is still a long way to go given the recovery is weaker than it looks. was at the time. Ding Shuang of Standard Chartered Plc predicts a further 10 point cut in key interest rates by the end of October.

“Given the continued Covid restrictions and the fragile economic recovery, we expect the government to continue to increase policy support in the remainder of 2022,” said Wang Tao, chief China economist at UBS. AG, in a footnote.

The derivatives market is signaling stronger expectations for an LPR cut as interest rate swaps on the country’s one-year prime rate fell after the unexpected PBOC rate cut.

The curve now implies 3.58% for the one-year forward LPR over a one-year horizon, down from 3.66% before the PBOC rate cut. This means there is scope for a reduction of around 10 basis points from the current level of 3.7%, according to Xing Zhaopeng, senior strategist at Australian & New Zealand Banking Group Ltd.

Unlike many advanced economies right now, China’s core inflation – which excludes volatility in energy and food prices – is fairly subdued, slowing to just 0.8% in July, domestic demand remaining weak. This gives the PBOC the leeway it needs to achieve its goals, including maintaining a stable currency, supporting growth, and preventing financial risk. However, the central bank has been cautious about easing too aggressively, which could hurt the economy in the long run given its already high level of debt.

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