PBoC likely to adopt 200 bps of RRR cuts this year, says ANZ Research

The People’s Bank of China (PBoC) is expected to adopt a 200 basis points reserve requirement ratio (RRR) cut through this year, after already adopting one this month, according to the latest report from ANZ Research.

Although the central bank is not an inflation-targeting central bank, a negative inflationary scenario will definitely prompt policymakers to put more weight on deflation control. After the cut of 100bps in January, China will thus still lower the RRR by another 100bps this year.

The PBoC also launched a Targeted Medium-term Lending Facility (TMLF). The cost of funding at the interbank market has dropped. Market interest rates have effectively been reduced in the past few weeks.

"We believe if the year-on-year CPI also falls to near-zero levels, China will consider a broad-based interest rate cut, i.e. lower the benchmark lending rate. Another potential countercyclical measure is property tightening," the report added.

The outskirt areas of Tier-1 cities have experienced a 10-20 percent drop in property prices. The Chinese government is aware of the negative consequences Japan experienced during its “Lost Decades” so Chinese policymakers will not want long-term expectations of property price deflation to emerge.

While the central government is unlikely to call for a relaxation of sales and mortgage control policies nationwide, they could allow targeted easing measures in some cities.