Analysis | China interest rate cuts further widen US policy gap, with all eyes on next Fed move at Jackson Hole
- China’s central bank on Monday cut both the one-year and five-year loan prime rates, continuing its policy divergence from the US Federal Reserve
- US Federal Reserve Chair Jerome Powell will address the annual economic symposium in Jackson Hole to offer clues about the central bank’s next moves
China’s latest interest rate cuts have further widened the policy gap between Beijing’s approach and that of the US Federal Reserve, which may further challenge efforts to stabilise the world’s second-largest economy.
The annual central bank symposium in Jackson Hole, Wyoming, begins on Friday with a speech from US Federal Reserve Chair Jerome Powell set to be closely watched for clues about the central bank’s next moves.
“The Fed is unlikely to significantly slow the pace of rake hikes because employment is strong and inflation worries remain high,” said Raymond Yeung, chief Greater China economist with ANZ.
“Chair Powell is likely to remind everyone that the Fed remains focused on lowering inflation expectations back to a sustainable 2 per cent. He will likely be wary of making more dovish comments,” Gavelkal Dragonomics, an economic research firm, said on Sunday.
“Further rate cuts may result in widening interest rate differentials between China and other major economics, especially the US. This may raise concerns of capital outflow, as well as increase pressure on bank earnings, which are already on a negative outlook due to the growth slowdown and property downturn,” she said.
China’s central bank first attended the Jackson Hole symposium in 2005, but its senior officials have largely been absent from the key central bank gathering in recent years.
This year, Reserve Bank of New Zealand governor Adrian Orr and South Korean central bank chief Rhee Chang-yong are set to attend.
“[Jackson Hole] has, in the past, been used to make significant announcements. And so, every year, traders are left on the edge of their seats in case of another [announcement] this time around,” said Craig Erlam, senior market analyst at Oanda.
“This year could be an anticlimax on that front, as the Fed’s message has been clear since it pivoted to a data-driven approach in July. The markets viewed this as a dovish pivot, and policymakers have since pushed back, not helped by the softer inflation data that further fuelled the speculation.
“The expectation is still that Powell will reaffirm what he and his colleagues have been saying in public recently, without giving too much away ahead of the September meeting, before which we’ll get another inflation-and-jobs report. The risk is that he says something dovish – intentionally or otherwise – after investors position for the opposite, and triggers another risk-on rally in the markets.”
On Monday, the PBOC cut the one-year LPR – on which most new and outstanding loans are based – from 3.7 to 3.65 per cent at the August fixing, while the five-year gauge – which is a reference rate for mortgages – was also cut from 4.45 to 4.3 per cent.
This has raised market fears of a potential depegging, although this was denied last month by Hong Kong Financial Secretary Paul Chan Mo-po.
“The higher US yield rate than Chinese peers has already been factored into the outflows of international investors’ portfolio investments in the past one or two quarters, and most likely in July,” added Yeung with ANZ.
“The important thing is to prevent domestic money from flowing out. This could be done through a variety of measures.”
China’s net financial outflows are estimated to have reached US$108 billion in the second quarter, almost US$38 billion more than a year earlier, according to S&P Global Ratings.
Beijing has highlighted its independent monetary policies and has capital controls in place to prevent larger-than-expected outflows, but the pressure has shown more on the yuan exchange rate.
The yuan midpoint, set by the central bank, approached a two-year low of 6.8198 against the US dollar on Monday. A high yuan exchange rate figure means it takes more yuan to purchase one US dollar, indicating a weaker Chinese currency.
Officials in Beijing have long complained that unprecedented monetary loosening in the West since 2020 has fuelled global inflation, and that the successive US rate increases have raised the prospect of a recession.
“The US dollar is a major reserve currency. Emerging markets and developing countries have the right to urge the US government, through the G20 summit or relevant meetings, to lower its debt ratio below 70 per cent,” former PBOC governor Dai Xianglong said at a seminar marking the 25th anniversary of the 1997 Asian financial crisis last week.
The US economy contracted for the second straight quarter from April to June after falling by 0.9 per cent on an annualised basis following a 1.6 per cent decline in the first quarter.
But despite meeting one definition of a technical recession, the US relies on a determination by a group of researchers at the National Bureau of Economic Research who look at a broader range of factors, including employment.
“[The rate] cut is much needed, as the property sector is currently the biggest drag to the economy,” said Larry Hu, chief China economist at Macquarie Capital.