Business / View

Interest rate cut more likely

(Xinhua) Updated: 2015-02-11 11:04

SHANGHAI - Lower than expected inflation has turned up the volume on calls for a looser monetary policy with interest rates perceived as too high in the current climate.

China's consumer price index (CPI) plunged to 0.8 percent in January,the weakest since November 2009.

Virtually all the indicators, from manufacturing activity to trade data, point to weakening. Expectations of an immanent reduction in the real interest rate have never been higher, despite the central bank's insistence on reining in financial risks and managing the debt burden.

A cut rate may fit in well with the long struggle to reduce financing costs for the private sector, especially smaller businesses. China's economic growth hit a 24-year low in 2014. High financing costs could put off investors, both in the real economy and the property market as overcapacity and oversupply eat into profits, so the inflationary low is just one more reason to cut benchmark rates and bring down overall borrowing costs.

Citibank forecast a 0.25 percentage point cut in the first quarter and another in the second. Citi's senior China economist Ding Shuang expects the first cut this month.

The central bank cut benchmark rates in November but claimed the cut did not signal any strong stimulus nor a change in monetary policy. Last week, the central bank lowered the reserve requirement ratio (RRR) for financial institutions and, again, claimed the cut was to offset capital outflow rather than open the gate for monetary easing.

Regulators, determined to shift the economic structure from investment-led to consumption-led, are reluctant to use monetary easing to boost growth. Instead, it is all about reform and favorable targeted policies, but falling inflation might precipitate some loosening, if only to stabilize growth.

China International Capital Corporation (CICC) said in a note that real interest rates are rising for both companies and individuals with knock-on effects on investment and consumption. According to CICC, low inflation means more room for loosening.

Globally, central banks have cut rates to reduce downside risks to growth and inflation. The European Central Bank unveiled the Eurozone version of quantitive easing last month, promising to buy 60 billion euros of private and public bonds each month.

Barclays chief China economist Chang Jian believes that frequent liquidity injections are needed to offset reduced capital inflows and foreign exchange intervention, and if inflation hits one percent this year the central bank should ease monetary policy through a mix of RRR and interest rate cuts. She expects two more RRR cuts and two interest rate cuts this year.

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