BEIJING (BLOOMBERG) - China's central bank is expected to cut its key policy interest rate for the second time this year on Friday (April 15) and reduce the reserve requirement ratio (RRR) within days to help bolster a faltering economy under strain from Covid-19 lockdowns.
Fifteen of the 20 economists surveyed by Bloomberg predict the People's Bank of China (PBOC) will lower the interest rate on one-year policy loans - 11 of them forecast a 10 basis-point reduction to 2.75 per cent and four expect a 5-point drop. The rest see no change.
The PBOC is also likely to reduce the RRR - the amount of cash that banks must hold in reserve - after the State Council, China's Cabinet, hinted strongly on Wednesday of a cut, saying it would lower the ratio "at an appropriate time". The two previous RRR cuts, in July and December last year, came days after a similar signal from either the State Council or Premier Li Keqiang.
Citigroup economists said they expect a 50-basis point, broad-based cut in the RRR to be confirmed as early as Friday, injecting 1.2 trillion yuan (S$255.5 billion) of liquidity into the economy. Nomura Holdings and Goldman Sachs also see a reduction of the same magnitude in the next few days.
Growth projections for China are being steadily downgraded and senior officials have given repeated warnings about the outlook, highlighting the seriousness of the situation. The government has pledged more fiscal and monetary stimulus to boost the economy as its growth target of around 5.5 per cent looks increasingly precarious.
"A rate cut should be considered the minimum help for the economy," said Ms Iris Pang, chief economist for Greater China at ING Groep NV.
Lockdowns and other virus control measures have led to logistics bottlenecks and shutdowns of factories owned by Volkswagen, iPhone-maker Foxconn Technology Group and others. Spending on tourism and car sales have plunged, while food prices are rising. Economists now predict economic growth will slow to 5 per cent in 2022.
The State Council said on Wednesday that it will "step up financial support to the real economy, especially industries and small businesses that have been hit hard by the pandemic".
The central bank lowered the rate on one-year policy loans - the medium-term lending facility (MLF) - by 10 basis points in January.
The PBOC's easing is in stark contrast to the US Federal Reserve, which has turned more hawkish recently to combat surging inflation. That divergence means the PBOC will quickly run out of time to cut rates, making an April move likely, many economists say. Aggressive rate hikes from the Fed would reduce foreign investors' appeal for Chinese assets, fueling capital outflows and putting pressure on the yuan.
The yield premium of China's 10-year government bond over Treasuries already vanished earlier this week for the first time since 2010.
The PBOC also has the opportunity to give banks a cash boost on Friday during its monthly liquidity operation. A total of 150 billion yuan of one-year MLF funds will mature this week. The central bank is likely to net inject 100 billion yuan of liquidity on top of rolling over the maturing amount, according to the median estimate of nine economists polled by Bloomberg.
"We expect the MLF injection in April to be in excess to accommodate a likely acceleration in local government bond issuance and to help boost credit supply," said macro analyst Wang Jingwen at China Minsheng Bank's research unit.
A stronger pickup in credit and faster inflation in March will not prevent the central bank from easing policy, economists say. The Covid-19 outbreak may have further dampened the real economy and weakened credit demand in April, requiring more monetary easing, according to Citigroup economist.
Those who predict no change in the policy rate, however, argue that the PBOC will prefer using other measures to boost growth.
"Monetary easing is more likely to come in the form of credit policy easing, as the PBOC evaluates the capital outflow risks amid the Russian-Ukraine conflict and the Fed's accelerated rate-hike cycle," said Ms Jian Chang, chief China economist at Barclays.
Domestic stagflation pressure from the global energy shock and supply bottlenecks are also a concern, she added.
