After US Fed’s rate hike, is China ready to embrace monetary easing measures?

Diverging monetary policies between the US and China have made Beijing wary about easing monetary operations this year, but the conditions to do so appear to be improving

It’s also possible that China’s central bank could lower the five-year loan prime rate on Tuesday, to support the property sector

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US Federal Reserve chairman Jerome Powell announced plans on Thursday to raise the benchmark interest rate by half a percentage point, bringing it to the highest level since 2007 as policymakers try to curb inflation. Photo: EPA-EFE

Published: 7:00am, 16 Dec 2022

A window of opportunity to implement stronger monetary policies is currently open for China after the latest moderate interest rate hike by the United States, according to analysts who are calling on Beijing to seize the chance to bolster the staggering economy amid abating spillover pressure and slowing inflation.

The US Federal Reserve announced on Thursday that it would raise its benchmark rate by 50 basis points to a targeted range of 4.25-4.5 per cent – lower than the consecutive 75-basis-point moves at each of the previous four meetings, but still bringing the rate to its highest level in 15 years.

Amid concerns over a full-blown economic recession, the Fed pointed to a “welcome reduction” in US inflation, and its dot-plot projection – reflecting estimates by the Fed’s policymakers for future interest rates – suggests that further but slower rate hikes could lift the benchmark rate to a range of 5-5.25 per cent by the end of 2023.

Many leading Chinese investment banks have been turning more optimistic. Citic Securities said in a note that the US rate-hike cycle could come to an end around March, with the rate peaking at 5 per cent. And China Merchants Securities, citing the US fiscal burden, expected that rate cuts may start from the third quarter of next year.

They said this leaves room for China’s central bank to make bold moves, as Beijing’s priorities have turned to shoring up beleaguered expectations and revitalising economic activities.

The divergence in monetary policies between the US and China has made Beijing wary about easing its monetary operations this year.

The People’s Bank of China (PBOC) kept its policy rates unchanged on Thursday. The rate on 650 billion yuan (US$93.5 billion) worth of one-year medium-term lending facility loans remained unchanged at 2.75 per cent.