China's People's Bank Signals Monetary Policy Easing Including Interest Rate Cut

Possibility of LPR Cut Increases with US Interest Rate Slowdown
"Measures Needed to Reduce Financing Costs"

[Asia Economy Beijing=Special Correspondent Kim Hyunjung] The People's Bank of China, the central bank of China, announced a direction for an accommodative monetary policy this year to stimulate the economy. As the United States slows down the pace of interest rate hikes, the possibility of China lowering interest rates within the year is also increasing.

On the 4th, the People's Bank of China held a working-level meeting to analyze major tasks over the past five years and discuss this year's work plan, then issued a statement with these contents. The People's Bank of China emphasized, "Monetary policy will become more flexible and appropriate," and "We will use various means to maintain liquidity reasonably and sufficiently." It added, "We will support consumption recovery and expansion, core infrastructure construction, and major projects," and explained, "We will implement financial measures to resolve funding issues for individual small and micro enterprises and support the stable and healthy development of the real estate market."

[Image source=Yonhap News]

The possibility of lowering the Loan Prime Rate (LPR), which serves as the benchmark interest rate in China, was also hinted at. In the statement, the People's Bank of China stressed, "Various measures must be taken to reduce the financing costs of market entities." Since August last year, the 1-year and 5-year LPRs have been frozen at 3.65% and 4.30%, respectively. The 1-year LPR serves as the benchmark for general loan interest rates, and the 5-year LPR is the benchmark for mortgage loan interest rates.

Despite the slowdown in consumption and the slump in the real estate market, China has been reluctant to lower interest rates due to concerns over the depreciation of the yuan and large-scale capital outflows if the interest rate gap widens with the United States, which has been taking 'big steps' in rate hikes. However, the market consensus this year is that the U.S. Federal Reserve (Fed) will slow the pace of interest rate hikes. After raising rates by 0.75 percentage points four consecutive times last year, the Fed already adjusted the hike to 0.5 percentage points last month. Bloomberg also forecasted, "Considering expectations that the Fed will conclude rate hikes, China has more room to lower interest rates."

The People's Bank of China also revealed plans to promote the pilot project of the legal digital currency (CBDC), the digital yuan, within the year and its commitment to financial digital business. The statement emphasized, "Cash management of the yuan should be strengthened, and the digital yuan program should be promoted in an orderly manner," and added, "The level of digital finance must also be continuously improved." Furthermore, it added, "Anti-money laundering supervision and protection of financial consumer rights and interests must also be strengthened."