Monetary policy prospects

Assessing the feasibility of rate cuts in 2025

• Although interest rates are already at historical lows and monetary policies have been accommodative for many years now, China has signalled a shift towards looser monetary policies. Notably, the effectiveness in monetary policy tools in addressing cyclical constraints to activity are limited.  
• The PBoC should not forget the importance of managing systemic risks to maintain economic stability, keeping an eye on the pressures facing the banking sector and enhancing the effectiveness of credit growth. With external uncertainties looming, it’s crucial to stay on top of systemic risks and avoid shocks to still subdued confidence and expectations coming from local governments, the financial sector, stock markets, and the currency in 2025.
• Maintaining credit growth of 8% in 2025 looks like it will be a more difficult challenge than last year – and we will watch closely if the levels of the growth or inflation targets are altered, or how fluctuations below the growth rate affect monetary policy decisions in 2025.
• The interactions between monetary and fiscal policies will be vital in supporting the economy. More and more, the central bank is having to make sure it’s coordinating closely with fiscal authorities to align monetary support with policies around infrastructure, real estate and local government debt, and, in tandem with, central and local government bond issuance programmes.
• Beijing has marked a shift towards looser monetary policies – although China already has historically low interest rates. This has created challenges for both individuals and institutions as they seek viable investment opportunities in an environment characterized by diminishing returns. We believe the central bank may proceed cautiously, delaying rate cuts – unless compelled by higher authorities.
• The Chinese currency is under pressure – and has been since November. Markets expect CNY/USD to weaken to 7.35 by year-end, driven by unsynchronized monetary policies, with the US and various geopolitical factors adding layers of complexity. The People’s Bank of China (PBoC) is adopting a hands-on approach to manage the currency. Notably, the weakening of the CNY is part of a broader trend affecting non-USD currencies, driven by changing expectations around US interest rate policies. 
• Much will depend on the trajectory of the US dollar, which appears biased towards strengthening, albeit with significant uncertainties. Other reasons for potential additional pressure on CNY include weaker-than-expected economic activity, a shrinking current account due to weak external demand amid global trade tensions, weak market sentiment, and accelerating capital outflows.