Will China Cut Its Base Rate Next Month?

Beijing will cut its benchmark interest rate as early as March 2025, after the People's Bank of China (PBOC) decided to keep its benchmark lending rate unchanged on February 20.

The PBOC has said it will cut interest rates in 2024 at an appropriate time, but so far China has not implemented this plan as Beijing policymakers face trade tensions with the US. (Source: Getty Images)

On February 20, PBOC announced to keep the 1-year basic lending rate unchanged at 3.1% and the 5-year basic lending rate at 3.6%.

"The pressure on banks' net interest margins and the exchange rate amid the slower pace of rate cuts by the US Federal Reserve has both led to the stabilization of China's policy rates," said Bruce Pang, visiting associate professor at the Chinese University of Hong Kong (CUHK) Business School.

Pang predicted that banks' reserve requirement ratios would be cut by 50 basis points as early as next month and predicted that the seven-day reverse refinancing rate - a key policy rate in China - would be cut by 40 to 50 basis points this year.

The PBOC typically uses the seven-day reverse refinancing rate - a measure to control the amount of liquidity in the banking system - to signal its monetary policy and guide its benchmark lending rate in the desired direction.

In recent months, the PBOC has sought to defend the yuan as it faces downward pressure amid threats of higher tariffs from the US, complicating the task of stimulating a weakening economy .

“We still think there is a good chance of a cut in the first quarter for the (seven-day reverse refinancing rate),” said Lynn Song, chief economist at ING Bank, explaining that real interest rates remain relatively high.

ING analysts predict the PBOC will cut interest rates after its annual parliamentary meeting in Beijing next month.

Pressure on the yuan has eased recently, creating room for a rate cut. So “further rate cuts could help encourage investment and consumption,” Song said.

China will announce its 2025 growth target at the annual session of parliament chaired byPresident Xi Jinping. The event, which usually lasts about a week, is expected to begin on March 5.

Chinese policymakers are likely to keep the official real growth target unchanged at “around 5%” while lowering the consumer inflation target to “around 2%” from “around 3%” last year, according to Goldman Sachs.

In addition, Chinese policymakers are expected to reaffirm their commitment to growth-boosting monetary easing at the upcoming parliamentary session while pledging to stabilize the yuan within a “reasonable range.”

However, supporting the yuan comes with risks for the world's second-largest economy, as a weaker yuan can help keep Chinese exports competitive abroad, while a stronger currency makes imports into China more expensive at a time when consumer demand remains weak.

Speaking at a conference in Saudi Arabia on February 19, PBOC Governor Pan Gongsheng said that a stable Chinese currency plays an important role in maintaining global financial and economic stability. Pan also reiterated Beijing's commitment to adopting a proactive fiscal policy and accommodative monetary policy this year.

The offshore yuan has depreciated nearly 2.5% against the US dollar since Donald Trump's landslide election victory (November 2024). On February 20, the yuan rose 0.20% to trade at 7.2673 yuan per US dollar.

Source: https://baoquocte.vn/trung-quoc-se-giam-lai-suat-co-ban-vao-thang-toi-305196.html