China’s 25bps RRR cut
Bottom Line: The 25bps RRR cut from the PBOC is designed to support the economic recovery, alongside the expansion of fiscal policy in H1. The bounce in the Yuan and low CPI inflation could allow a cut in the 1 and 5 yr LPR rates, if the economy falters. However, a cut is unlikely at the March 20 PBOC meeting.
Figure 1: China Core and Headline CPI (Yr/Yr)
Source: Datastream
The PBOC 25bps cut in RRR is a surprise more in timing rather than size and concept, as no major rumours had been evident. For domestic reasons, the RRR will be helpful in reinforcing the economic recovery that is the central focus of the authorities. The spate of data in February was in line with expectations and showed a recovery from Q4.However, the reopening has produced a boom in consumption and the authorities know that some policy support is needed.
We would suspect that this does not mean a cut in the 1 and 5yr LPR rate from the PBOC on March 20 or in April. China authorities are adding more fiscal stimulus in H1 and will want to see more data before deciding on extra monetary stimulus.
However, if the recovery were to fade then a cut in LPR is possible in Q2 for two reasons. Firstly, the Yuan has managed to stabilise and see a small bounce, as Fed tightening fears have been tempered in the wake of the regional bank crisis in the U.S. Secondly, the February CPI was only 1.0% Yr/Yr and allows the authorities scope to ease, as inflation is not a problem or likely to be during the recovery.