Fed hike end talk stirs easing buzz

The scope for China to beef up monetary support for economic recovery has expanded as US interest rate hikes appear to be nearing an end, with another reserve requirement ratio cut possible this year, experts said on Monday.

The People's Bank of China, the country's central bank, cut the RRR by 0.25 percentage point on Monday, a move that experts said has reduced the amount of cash that banks must hold as reserves and released more than 500 billion yuan ($72.67 billion) to meet rising demand for liquidity as credit growth recovers.

Ye Yindan, a researcher at the Bank of China Research Institute, said there remains the possibility of the RRR falling further this year, especially around midyear when liquidity supply could become tight as a large amount of medium-term lending facility loans — a key liquidity provision tool — reach maturity.

Whether such a possibility will materialize depends on economic fundamentals, Ye said.

"If the momentum of economic recovery proves weak, an RRR cut would be appropriate to supplement medium- and long-term liquidity. Otherwise, MLF loans are expected to be the main tool to provide liquidity."

Her comments echoed remarks by Han Wenxiu, executive deputy director of the office of the Central Committee for Financial and Economic Affairs. Han said at the Economic Summit of the China Development Forum 2023 on Saturday that the country's monetary policy has relatively large room to maneuver as inflation remains mild.

China's monetary policy flexibility has increased as the US Federal Reserve may stop rate hikes soon, Ye said, which will ease depreciation pressure on the renminbi due to the two countries' monetary policy divergence.

Continuing its efforts to curb inflation, the Fed increased key interest rates by 25 basis points to the range of 4.75 percent to 5 percent on Wednesday, but no longer declared that ongoing increases in rates will likely be appropriate while hinting at only one more rate hike of 25 basis points ahead this year.

This has indicated that the Fed's rate hike cycle is reaching a conclusion, experts said. Recent US banking turmoil has not only flagged the risk that more rate hikes could endanger financial stability, but could also cause credit contraction, slow the US economy and cool down inflation — which will make monetary tightening less necessary and even raise easing chances.

Recognizing that the Fed slowing down rate hikes is creating a more favorable condition for China to ease monetary policy, Lou Feipeng, a researcher at Postal Savings Bank of China, said it is necessary to consider further RRR cuts based on actual situations given that the foundation of China's economic recovery is not yet solid.

Lou, nevertheless, cautioned that the space for RRR cuts should be wisely used. "Policy space needs to be cherished, and the window of the next RRR cut may be the third and fourth quarters of the year," he said.

With Monday's cut, China's weighted average RRR for financial institutions has come down to 7.6 percent, compared with nearly 15 percent in 2018, according to the PBOC.

Some experts deem 5 percent as an unstated floor for China's RRR, though others believe there is room for further declines considering that some advanced economies have cut their RRRs to zero.