In an effort to maintain a delicate balancing act between pushing economic recovery and limiting further depreciation of the yuan, China left benchmark lending rates (LPR) unchanged at a monthly fixing on Monday.
But even as this was expected by the market, according to analysts at Capital Economics, the central bank, The People's Bank of China will be forced to slash rates sooner rather than later, owing to the weakening momentum of the world’s second largest economy.
“Policymakers may want more time to assess the impact [of the recent policy measures] before they make further changes to the benchmark rate,” a Capital Economics note accessed by The Epoch Times said.
“[But] The big picture is that, with the economic momentum weak, rate reductions will come before long. We anticipate 20 basis-points [0.2 percent] of cuts by the end of quarter-one next year,” the note added.
According to the National Interbank Funding Center, the one-year loan prime rate (LPR), which is determined by the market and serves as a benchmark for determining interest rates, was set at 3.45 percent on Monday, and did not move from the previous month's level.
The five-year LPR, which is used by many lenders as a basis for determining the interest rates they provide for mortgages, remained constant as well from the previous rate of 4.2 percent.
Reportedly, The People's Bank of China last week also requested some lenders to cap their interest rates, highlighting the authorities' intention to keep borrowing costs low in the slowing economy, even as the central and local governments issue more debt to fund infrastructure and consumer sectors.
The central bank instructed banks to maintain somewhat stable interest rates ahead of its medium-term loan policy announced on Monday.
Faltering MomentumOver the past four months, as China's post-pandemic recovery faded quickly, Beijing adopted a host of policy steps to jumpstart a flagging economy.
However, those measures hardly proved effective, prompting many to question if they can meet Beijing's official GDP growth target of 5 percent this year, the lowest in decades.
With property sales continuing to fall and investment in real estate plummeting, analysts also feared that the permeating risks of the real estate crisis will spread to other sectors of China's economy.
The Yuan FactorYet, while China's property industry and its economy require additional policy support, analysts believe that an increase in monetary easing will put unwanted downward pressure on the Chinese currency as well.
This also means that “outﬂow pressures will persist amid unfavorable interest rate spread,” according to a Goldman Sachs note published last week.
However, despite the negative rate spread, “top policymakers continue to prioritize [on the yuan] stability,” due to “the depreciation pressures on the currency,” said the note.
“We expect the yuan to dollar exchange rate [thus] to be broadly stable at 7.30 [yuan to a dollar] in the next few months,” the note added.