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China likely to cut interest rates by March to spur economy - Reuters poll
December 17, 2014 / 2:29 PM / 3 years ago

China likely to cut interest rates by March to spur economy - Reuters poll

(Reuters) - The People’s Bank of China will cut interest rates again by March, two-thirds of the economists in a Reuters poll said.

100 Yuan notes are seen in this illustration picture in Beijing November 5, 2013. REUTERS/Jason Lee

China’s central bank surprised financial markets on Nov. 21 by cutting rates, for the first time in two years, in a bid to get faster growth in the world’s second largest economy - expanding at its slowest pace in nearly 25 years - and thwart deflation risks.

The PBOC cut the one-year benchmark lending rate by 40 basis points to 5.6 percent. It also lowered one-year benchmark deposit rates by 25 basis points to 2.75 percent.

It is likely to act again, sources involved in policy-making told Reuters in November. This indicates that top Chinese leaders, who long resisted a rate cut, were eventually swayed by weak growth and cooling home prices.

Ten of 15 economists surveyed over the past week said the next cut in the benchmark lending rate by a median 25 basis points is likely to come by March. The others predicted either April or May for a cut from the current 5.60 percent.

“If the PBOC doesn’t want markets to get too rattled by bad economic prints and weak global markets, it is likely to follow through soon,” said Vishnu Varathan, economist at Mizuho Bank in Singapore. He put the chance of the central bank moving again by Dec. 31 at 50 percent.

“Ad-hoc liquidity injections don’t inspire enough confidence and interest rate cuts, either the repo rate or one of its other rates are better signals of policy easing,” Varathan said.

So far, policymakers have persisted with targeted steps such as cuts in reserve ratios for selected banks and liquidity injections into the banking system to free up cash for lending.

But borrowing costs have remained high for companies, manufacturers and local governments who have struggled to service debt in the face of disinflation.

Consumer inflation has steadily cooled in China in recent months as a spectacular plunge in global crude oil prices and a slowing domestic economy knocked price rises lower. Producer prices have been falling for almost three years pressuring manufacturers and squeezing profits.

That trend is unlikely to reverse anytime soon, especially as some of China’s major trading partners grapple with disinflation and weak growth, crimping demand for Chinese goods.

The European Central Bank is widely expected to begin sovereign bond purchases early next year to pull the 18-member monetary bloc out of weak growth and away from rising risks of deflation.

The U.S. Federal Reserve and the Bank of England, in contrast, are expected to begin raising interest rates next year, although weak growth in pay and low inflation have put the timing of hikes into doubt.

A majority of economists in the latest poll expect the PBOC to cut the reserve ratio and deposit rate sometime in the first three months of 2015.

“The PBOC may need to inject liquidity to lower borrowing costs for small firms who don’t directly benefit from benchmark rate cuts and to offset tightening from tougher banking regulation likely to be introduced shortly,” said Mark Williams, economist at Capital Economics.

The poll showed respondents expected both the lending and deposit rate to be cut by 50 basis points each next year, to 5.10 percent and 2.25 percent respectively. The reserve ratio is expected to be cut to 18.50 percent by December 2015, from the current 20 percent.

Additional reporting and polling by Judy Hua in Beijing and Shaloo Shrivastava in Bengaluru; Editing by Richard Borsuk

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