China delivered another small dose of token monetary accommodation on Monday, when the PBoC cut the 7-day repo rate by 5bps to 2.5%.
It was the first cut since 2015, and comes on the heels of a similar 5bps cut to the MLF rate earlier this month.
On Friday, the PBoC injected a “surprise” 200 billion yuan in one-year liquidity. The move was not tied to maturing loans, and it came on the same day that the second of two targeted RRR cuts went into effect, freeing up an additional 40 billion in liquidity.
This is more dribs and drabs and it will almost surely be followed by a lower loan prime rate later this week.
Credit growth collapsed in October beyond what the seasonal effect “should” have entailed, and the most recent activity data showed the world’s second-largest economy is still struggling to find its footing.
And yet, the PBoC is hamstrung in its capacity to deploy aggressive easing. In addition to a desire to preserve the deleveraging campaign and avoid encouraging speculation and financial excess, Beijing is staring down the highest CPI in seven years thanks in no small part to soaring pork prices.
“Too much” monetary easing could exacerbate the pain for consumers, even as it would help shore up the economy. Factory-gate prices, you’re reminded, are mired in deflation.
Over the weekend, in its third quarter monetary policy report, the PBoC underscored the balancing act. Surging inflation “must be drawn to attention” the bank said, on the way to noting that although authorities will “properly handle the short-term pressure” on the economy, the central bank won’t be unleashing “excessive” liquidity.
Monday’s 5bps cut to the 7-day repo rate is yet another testament to the notion that the PBoC will stay the course with gradual, targeted easing aimed at providing what’s necessary to keep things on track, but nothing more.
Although the yuan and Mainland shares both came into Monday having snapped weekly winning streaks, Bloomberg’s Mark Cranfield notes that “stability in the [currency] and stocks may mean there is less incentive for the PBOC to go for an official rate cut in the near term”.
And all of this is to say nothing of how irritated Donald Trump would be if China were to cut a rate that he actually understands.