BEIJING (BLOOMBERG) - The People's Bank of China (PBOC) pledged to keep monetary policy supportive to aid the economy's recovery, while signalling that stimulus would likely focus on boosting credit rather than lowering interest rates.
In a rare interview conducted in English with a state broadcaster, PBOC governor Yi Gang said policy "will continue to be accommodative to support economic recovery in aggregate sense".
A transcript of the interview with China Global Television Network was released on Monday (June 27) by the central bank in both English and Mandarin, a sign that Mr Yi's comments were targeted at an international audience.
The governor said China's "real interest rate is pretty low" after taking inflation into account, comments that suggested there is limited room for large-scale rate cuts.
"The PBOC is focusing more on the changes in the overall quantity of social financing and loans, instead of the price of interest rate," said Mr Zhang Zhiwei, chief economist at Pinpoint Asset Management. "Yi's comments show that the PBOC is reluctant to cut interest rates."
Yields on the benchmark bond steadied on Tuesday after slipping 1 basis point to 2.82 per cent following Mr Yi's comments.
Rates strategist Kiyong Seong at Societe Generale said the PBOC's targeted monetary easing is well priced into the market.
Mr Yi's interview was largely focused on the PBOC's past efforts in supporting the economy's green transition before he spoke about monetary policy. He said the central bank's "high priorities" are to maintain stable prices and maximise employment. It will also continue to focus on structural policies such as those supporting small businesses and green projects, he added.
On inflation, he said the "outlook is stable", with consumer prices rising 2.1 per cent in May and producer prices increasing 6.4 per cent.
Mr Zhang said the central bank could use tools, including the reserve requirement ratio for banks or the relending programmes, to expand overall financing in the economy.
On top of the low real interest rate, another reason for the PBOC to be cautious with rate cuts is that the economy is weighed down by Covid-19 restrictions, a problem monetary policy cannot effectively address, he added.
Mr Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank, echoed those views. "My impression is that further room for a large rate cut would be limited," he said. The PBOC seems to be "targeting on the aggregate financing outstanding amount".
The PBOC has taken a modest approach to easing this year, as weak borrowing demand in the face of Covid-19 lockdowns and the tightening of monetary policy overseas narrowed its policy room.
It has refrained from cutting policy interest rates since January. It has also put more pressure on banks to expand lending, which has proved to be an uphill battle as households and companies turned cautious with borrowing under Covid-19 lockdowns.
PBOC deputy governor Chen Yulu highlighted the central bank's targeted approach to monetary policy at a briefing last week. He said the central bank has kept the monetary sluice in check and avoided flooding the market with liquidity.
Structural monetary policy tools enhance the allocation of loans and at the same time support credit growth, he said, adding that their quantity and scale would be kept at an appropriate level.
Chinese officials will have to roll out additional fiscal and monetary policies in the second half to support economic growth, and there is still ample room for such moves, the Securities Times said in a report on Tuesday.
Fiscal policies will continue to play a major role, while more structural monetary policy tools could be adopted, the report said, citing analysts including Dr Wang Qing at Golden Credit Rating. The newspaper is managed by the official People's Daily.
In response to a question about the yuan's recent depreciation, Mr Yi said China has a flexible and market-determined exchange rate system using a basket of currencies as reference. The reminbi has strengthened against the US dollar by 25 per cent over the past two decades and even more in real terms, he added.