If there’s a common theme running throughout research notes today – aside from plethora of puns recounting the Wallabies world cup semi final win over the Pumas – is that the monetary policy easing announced by the People’s Bank of China (PBoC) on Friday evening is unlikely to be the last the markets will see in 2015.
Yes, the 25 basis point reduction to benchmark lending and deposit rates, along with the 50 basis point reduction to the reserve ratio requirement for banks, is merely part of a broader easing cycle the PBoC will continue to implement over the months ahead.
Below are the views expressed by a variety of different analysts and expectations for further easing are nearly unanimous across the markets.
Here’s Qu Hongbin, Paul Mackel, Julia Wang and Ju Wang – economists and strategists at HSBC – on what they expect from the PBoC in the period ahead.
“The announcement suggests that the PBoC remains on an easing path in an environment of sluggish economic growth and persistent deflationary pressures. The central bank has pledged to keep adjusting monetary policy to prevent a downward spiral in domestic demand, while keeping an eye on overall level of leverage. We forecast another 100bps reserve ratio cut for the remainder of 2015. In addition, we expect another 25bps policy rate cut and 200bps reserve ratio cut in 2016. Economic activity has showed signs of stabilising (for example, in the property market), and should rebound modestly in the coming months (our full year GDP forecast is at 7.1% for 2015). Meanwhile, recent market jitters have not deterred the PBoC from delivering reforms. PBoC governor Zhou Xiaochuan has said that full RMB capital account convertibility is likely before year-end (see Getting Bold: Why Beijing is so determined to push full RMB convertibility, 20 April 2015). We think this process remains on track and that policy makers will deliver more reforms in the coming months.
Like HSBC, Mark Williams, chief Asia economist at Capital Economics, believes there will be further easing ahead. He also notes a similarity in the timing of the PBoC announcement.
“The PBoC is following a path of regular, fairly steady easing. Before today, it had announced benchmark interest rate or reserve requirement cuts (or both) six times this year at roughly two-month intervals. The last shift was announced on 25th August. As it happens, that is 59 days ago. A 59-day gap also separated that August announcement from the previous one in June.
The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have plenty of room to loosen. We are retaining our forecast that benchmark rates and the RRR will both be cut once more before the end of the year, with a further move in both early in 2016.”
Wei Yao and Claire Huang, China economists at Societe Generale, believe that that policy easing announced by the PBOC was expected and well timed, with more reductions to the reserve ratio requirement likely.
“The PBoC is getting better and better at seizing the right timing for monetary policy easing. The move is clearly responding to the still weak growth data released earlier. Modest inflationary pressures, as indicated by another negative GDP deflator in Q3 and falling inflation reading in September, offers the PBoC more room to ease. Most importantly, the Fed’s hesitation to hike rates has eased some capital outflows pressure on EM, including China. There is no better timing for the PBoC’s rate cut.
The easing is well expected, and it does not make any difference to our growth expectation. Fiscal easing and infrastructure funding have picked up, which is more effective than the PBoC’s easing in supporting short-term growth. We expect one more 50bp RRR cut by the years end.”
Like his compatriots offshore, Westpac’s senior international economist, Huw Mackay, is also of the view that the PBoC will continue to ease policy in the months ahead, confidentially predicting that it will not be the last of the current easing cycle.
“These cuts will not be the last in this protracted easing cycle”, he wrote.
Although only four views, they broadly capture the sentiment of the market — that is, that just like the policy easing announced on Friday evening was widely expected, so too is the expectation for more easing in the period ahead. With that already priced in by markets, it suggests that while it may provide a short-term boost to risk assets, its effect is likely to be fleeting in nature.
Further easing, based off current sentiment, is not seen as a question of if but when. Given recent patterns, perhaps in two months time.