PBOC Signals More Use of ’Innovative’ Monetary Policy Tools

  • Commentary adds to call for monetary policy to stay prudent
  • Large-scale easing in the near term has been ruled out: RBS

China’s central bank has given more signals about its evolving monetary policy stance, flagging continued use of liquidity tools rather than further cuts to interest rates or the percentage of deposits banks must hold as reserves.

China should improve the effectiveness of monetary policy by using more "innovative monetary tools" such as its medium-term lending facility and standing lending facility, and policy makers should give more forward-looking guidance to manage market expectations, according to a commentary published Monday by a newspaper under the People’s Bank of China. 

The PBOC introduced the MLF in late 2014 to inject cash into areas such as agriculture and small and medium-sized companies, while the SLF is considered the ceiling of an interest-rate corridor being formed by the central bank.

The PBOC has been reticent to add to an easing cycle that started late in 2014 amid concern that companies have fallen into a "liquidity trap" as the effectiveness of cash injections on investment and growth wanes. In a report on Friday, the PBOC said frequent cuts in interest rates and banks’ required reserve ratio would add too much liquidity to the financial system and could lead to expectations that the yuan will depreciate. It said policy should remain "prudent."

The PBOC’s recent comments rule out an RRR or rate cut in the near term, Harrison Hu, Singapore-based chief greater China economist at Royal Bank of Scotland Group Plc, wrote in a note on Monday. "Monetary easing may be carried out in a more low-key way, in order to limit its side-effects."

Hu said rates on pledged supplementary lending and MLF are more likely to be lowered, along with expanded volumes of liquidity. He continues to expect an easing bias will resume later in the year as earlier property and infrastructure stimulus runs its course.

— With assistance by Yinan Zhao

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