China’s Central Bank Should Cut Rates, Former Official Says

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China should cut interest rates in the second half of the year to safeguard the economy’s recovery and create policy room to deal with the Federal Reserve’s future tightening, a former central bank official said.

“The second half of the year is an important window when China’s monetary policy can tilt toward loosening while remaining stable, and the interest rates can be lowered in a reasonable and moderate manner,” Sheng Songcheng, a former director of the People’s Bank of China’s statistics and analysis department, wrote in an article published Tuesday.

Reducing interest rates can help moderate the inflow of short-term, speculative capital from overseas, ease the yuan’s appreciation pressure and help stabilize export growth, Sheng said. It will also provide more room for the PBOC to hike rates to deal with capital outflow pressures when the Fed starts to normalize policy, he said.

Futures on China’s 10-year benchmark bonds rose as much 0.30 to 98.60 in elevated trading activity following the comments. The onshore yuan held onto gains of 0.2% at 6.4661 per dollar.

“A new rate cut cycle will be surprising” given the central bank’s repeated vow to stabilize the macro leverage ratio, or total debt as a proportion of gross domestic product, said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd. The PBOC is likely to use regulatory measures to control debt, while avoiding a rate cut because it will drive depreciation pressures on the yuan, he said.

The PBOC has refrained from making any changes to its policy interest rates since cutting them early last year to shore up the pandemic-hit economy, choosing instead to guide credit growth lower since late last year to curb financial risks. The central bank said last week it will maintain a steady policy and prevent “external shocks” from overseas policy changes.

Sheng said China’s economy still faces many weaknesses including a slow recovery of consumption and lower-than-expected investment growth. Monetary policy should step up and provide more support as fiscal spending has been relatively weak so far this year, he said.

Read More: China’s Growth Forecasts Cut by Economists on Weak Data

China can afford to loosen monetary policy because inflation still remains subdued, Sheng said. He expects consumer inflation to reach around 2% this year, below the government’s official target of about 3%. That’s in line with a forecast from PBOC Governor Yi Gang, who said last month inflation will stay below 2%.

Sheng said cutting interest rates moderately will ease pressure on smaller banks and alleviate the debt repayment burden on local governments, which will help prevent financial risks.

Most analysts expect the PBOC to leave interest rates unchanged this year and possibly next year. Standard Chartered Plc economists predicted last week the central bank will hike its rate for the medium-term lending facility in the fourth quarter of 2023.

More clarity on the future direction of monetary policy may come at the next meeting of the Communist Party’s Politburo centered on economic affairs, which is normally scheduled at the end of July each year.

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