Macroscope | Is China’s interest rate easing cycle nearing an end?
- The PBOC’s latest lending rate cuts last week, the second in two months, are admittedly modest but pushing them further risks triggering inflationary pressures
- With the economy slowing, however, Beijing must find less risky ways of boosting consumer demand and business confidence
Could China be in danger of relying too much on monetary reflation at the expense of domestic financial stability? The last thing Beijing should be doing is mimicking the West’s dependence on ultra-low interest rates. There are less risky ways for China to galvanise growth.
Any easing of borrowing costs would normally be welcome but the latest round of interest rate cuts by the People’s Bank of China was underwhelming. Size matters when it comes to making a monetary splash so last week’s 10-basis-point cut in the one-year loan prime rate, from 3.8 per cent to 3.7 per cent, after last December’s 5-basis-point easing will have caused little more than a ripple.
Cuts of this magnitude are too small to make any real difference to bottlenecks in the economy or to stimulate more significant loan demand from consumers or businesses. Diminishing marginal returns are already having an effect with current interest rate levels so low.
