Central bank sees possible window of opportunity on expected Fed moves

The People's Bank of China, the country's central bank, may implement another interest rate cut in the near future to shore up the economy while its US counterpart is expected to tighten its policy significantly, experts said on Monday.

Hong Hao, managing director and head of research at BOCOM International, said the PBOC is likely to make use of a window of opportunity in February to reduce interest rates as the United States Federal Reserve may initiate interest rate hikes in March, which will make it harder for the PBOC to implement rate cuts.

"It is probable that the PBOC will further cut the interest rate of medium-term lending facility, a key policy rate, on Feb 18," Hong said.

The latest economic data indicated that the Chinese economy has yet to bottom out and pointed to the necessity of more easing measures, he added.

The Caixin China General Services Purchasing Managers' Index, a privately surveyed gauge of services activity, fell from 53.1 in December to 51.4 in January, indicating that services activity growth had slipped to a five-month low last month, media group Caixin said on Monday.

The composite PMI, which covers both the manufacturing and services sectors, also dropped to 50.1 in January from 53 in the previous month, pointing to weaker economic growth momentum, Caixin said.

Chen Xingdong, chief China economist with BNP Paribas, said the PBOC will likely further cut the MLF interest rate in April or May by 5 basis points to boost credit growth and stabilize domestic demand.

There will remain some room for China to cut interest rates in April or May, but maneuverability will narrow later due to the anticipated continuous rise in interest rates in the US and other developed markets, Chen said, adding that the Fed may implement rate hikes six times this year beginning in March.

With financial policy support to spur credit expansion, China's economic momentum may pick up in the third quarter, underpinned by reviving consumer behavior and more investment in infrastructure and industrial sectors, he said.

For the first time since April 2020, the Chinese central bank lowered the one-year MLF interest rate in Jan by 10 basis points to 2.85 percent in order to reduce corporate financing costs.

The one-year benchmark lending rate, or the loan prime rate, also dropped by 10 basis points to 3.7 percent in January, following a reduction of 5 basis points in December.

While China is stepping up easing measures to buffer downward economic pressure, the US Fed is accelerating the pace of tightening to tackle inflation, hinting that it could start raising interest rates as soon as March.

"Room for cuts in interest rates and the reserve requirement ratio may still exist for China after the Fed starts to raise interest rates, but the room may indeed get smaller," said Shao Yu, chief economist at Shanghai-listed Orient Securities.

Against such a backdrop, Shao said the PBOC may leverage more structural policy support, such as new targeted tools in support of credit expansion, to bolster the economy in the rest of the first quarter.

Liu Guoqiang, vice-governor of the PBOC, said last month that the central bank will "open the tool kit of monetary policy even wider", grant ample policy support to the economy and make needed efforts as quickly as possible.