"Economic Recovery Trends and Inflation Review"
"Excessive Low Interest Rates → Must Prevent Deflation Vicious Cycle"
The People's Bank of China, the country's central bank, has attracted attention with remarks aimed at preventing a vicious cycle of falling prices caused by excessively low interest rates. Although the economy grew by 5.3% in the first quarter, boosting confidence in the recovery, the bank is expected to take a cautious stance on future rate cuts to curb persistent deflationary pressures (price declines amid economic downturn).
On the 18th, officials from the People's Bank of China and the State Administration of Foreign Exchange explained the financial operations and foreign exchange balance for the first quarter at a press conference held by the State Council Information Office. Zhou Ran, Director of the Monetary Policy Department at the People's Bank, emphasized, "A comprehensive review and judgment of inflation and real interest rates are necessary in monetary policy," adding, "It is important to prevent a vicious cycle where excessively low interest rates intensify competition and capital outflows, leading to further price declines."
Director Zhou also stated, "A series of initial measures have been effective, and we will continue to closely monitor the economic recovery trend and inflation developments," adding, "Interest rates should be maintained at a reasonable level according to price trends while fully considering the need for qualitative development." He explained, "Nominal interest rates have continuously declined over the past two years, playing a positive role in promoting overall economic recovery, but (when rates fall) domestic demand weakens and price declines occur simultaneously."
Earlier, Zhu Hexin, Deputy Governor of the People's Bank, said, "With the national economy continuously rebounding, the central bank still has several tools available in its monetary policy," and added, "We will observe the effectiveness of policies, economic recovery, and the achievement of growth targets to manage reserve measures."
These remarks are interpreted as a signal that interest rate adjustments will be approached cautiously for the time being. In particular, the need to defend the exchange rate amid the recent depreciation of the yuan is also expected to have an impact. On the 15th, the People's Bank of China kept the Medium-term Lending Facility (MLF) rate, which provides short-term funds to commercial banks for one year, steady at 2.50%. The MLF rate has been unchanged for six months. Accordingly, the Loan Prime Rate (LPR) scheduled for the 20th is also expected to remain unchanged. In February, the People's Bank lowered the 5-year LPR from 4.20% by 0.25 percentage points, and in March, both the 1-year and 5-year LPRs were held steady at 3.45% and 3.95%, respectively.
Regarding the yuan exchange rate, Deputy Governor Zhu stated, "Overall, stability is being maintained," and added, "The People's Bank's goal and determination to stabilize the exchange rate will not change." The day before, the People's Bank set the yuan midpoint rate at 7.1020 per US dollar, up 0.007% from the previous day. Deputy Governor Zhu forecasted, "With the economy off to a good start in the first quarter and improvements in various sectors' constraints, external shocks will be hedged, supporting the yuan exchange rate." He further predicted, "As the maturity and flexibility of our foreign exchange market continue to improve, the exchange rate trend will stabilize and remain relatively balanced."
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