Interest rate, RRR cuts may be on table

China has both room and growing necessity to cut interest rates in the coming months, as top policymakers step up efforts to stabilize growth amid weakening economic momentum, analysts said.

Song Yu, chief China economist at UBS Securities, said that with top policymakers placing greater emphasis on stabilizing growth to ensure a solid start to the 15th Five-Year Plan (2026-30) period, monetary conditions are likely to remain accommodative in the coming months, with ample market liquidity and low interbank funding rates.

Song said China still has room to cut interest rates and the RRR — the proportion of deposits banks must keep in their vaults as reserves — in the coming months to lower financing costs for businesses, and such tools may be deployed in a flexible, data-based manner.

"While uncertainty over the US Federal Reserve's policy path remains elevated, past experience suggests that China's cross-border capital flows and exchange rate are primarily determined by domestic economic and market conditions, rather than the interest rate differential with overseas markets," Song said, adding that the inflation outlook also strengthens the necessity for easing.

"As imported inflationary pressure from international oil prices recedes, China's consumer inflation is expected to soften in the coming months, leaving ample room for monetary easing and potentially reinforcing the need for additional policy support to stabilize prices and bolster domestic demand."

A top-level meeting on Thursday called for effectively implementing a more proactive fiscal policy and an appropriately accommodative monetary policy, saying that pragmatic and effective incremental policies will be introduced in a timely manner.

Analysts view this as policy fine-tuning that signals a greater intensity of macro policy stimulus in the second half, as GDP growth in the second quarter had fallen to 4.3 percent year-on-year, putting some pressure on achieving the full-year target of 4.5 to 5 percent growth.

The People's Bank of China, the country's central bank, pledged at a meeting on Saturday to comprehensively utilize monetary policy tools and make timely adjustments to keep ample liquidity, while maintaining the low level of overall social financing costs.

While room for further monetary easing exists, the key question is how to calibrate the timing and magnitude of any policy moves to maximize their impact, analysts said, as the effectiveness of such measures may depend on stronger fiscal support and a recovery in private sector confidence.

Zhu Feng, China chief economist at JPMorgan, said that monetary policy should correspond with fiscal policy in the second half to maintain ample liquidity, focusing on structural monetary tools and re-lending facilities to lower financing costs for the real economy and stabilize the property sector.

"We expect a 10-basis-point interest rate cut. Yet with interest rates already at relatively low levels, the stimulative effect of further rate cuts could be limited," Zhu said.

He said such a move would mainly signal the authorities' commitment to maintaining an appropriately accommodative monetary stance, rather than be sufficient on its own to reverse weak domestic demand.

Zhu added that China's economy is likely to stabilize in the second half, with fiscal policy, external demand, high-tech manufacturing and services consumption to help cushion the pressures from the property market and external uncertainties.