China: More cuts in the pipeline – Standard Chartered

PBoC cuts MLF rate by 20bps in a surprise move, likely intended to close the gap with the market rate. Role of MLF rate is fading, but it will likely remain an important liquidity injection tool near-term. We now expect one more 10bps cut to the 7-day reverse repo rate in Q1-2025, on top of a 10bps cut in Q4. We now see a 20bps MLF rate cut in both Q4 and Q1-2025, taking the rate to 1.9%, Standard Chartered economists Shuang Ding and Hunter Chan note.

More room for MLF rate cuts

“China’s authorities appear to have shifted focus to stabilising growth following a disappointing Q2. Growth slowed sharply to 0.7% q/q from 1.5% in Q1, putting the annual growth target (5%) at risk. The recent Third Plenum urged the government to make good use of macro policies to boost domestic demand and achieve the annual target.”

“The People’s Bank of China (PBoC) surprised the market by cutting the 7-day reverse repo (7DRR) rate – the main policy rate – by 10bps on 22 July. It also unexpectedly conducted medium-term lending facility (MLF) operations on 25 July, in addition to the usual operations on 15 July, injecting CNY 200bn to keep liquidity ample before month-end.”

“We now expect two more 7DRR rate cuts by Q1-2025, taking the rate to 1.5%. The Fed is expected to start its rate cutting cycle in Q3; this would likely reduce pressure on the CNY, thereby relaxing a key constraint on monetary easing in China. The upcoming Politburo is likely to push for faster fiscal spending in H2 to make full use of the approved budget.”