(Bloomberg) -- China has promised once again to step up monetary support, raising expectations that an interest rate cut or other easing measures could happen as early as next week. 

The State Council, China’s Cabinet, on Wednesday pledged to use monetary policy tools at an “appropriate time” to boost the economy, citing worsening risks that have “intensified” and in some cases “exceeded expectations.”

The world’s second-largest economy is battling its worst Covid outbreak ever, with ballooning infections in Shanghai forcing the financial and trade hub into an extended lockdown. The war in Ukraine has clouded the global economic outlook, threatening Beijing’s gross domestic product growth target of about 5.5%. And the U.S. Federal Reserve is expected to raise interest rates several more times this year to combat inflation, an aggressive tightening campaign that stands in contrast to China. 

 

Wednesday’s State Council statement didn’t explicitly mention any specific forthcoming action, such as a policy interest rate cut. But recent economic data has been poor and the government has made repeated vows to stabilize the economy in recent weeks. Four of the five economists surveyed by Bloomberg so far expect the People’s Bank of China to lower the rate on its one-year policy loans by 5-10 basis points on April 15. 

The State Council’s statement “implies more monetary easing in April,” said Larry Hu, an economist at Macquarie Capital Ltd. A rate cut “is more about boosting confidence than boosting credit demand,” he added. “We expect the cut mainly because the weak economy warrants another cut as soon as possible.”

Hu expects a reduction in the one-year loan rate -- the medium-term lending facility rate -- of 10 basis points in April. 

While Fed hikes are fueling concerns of foreign investment outflows and a weaker Chinese currency, that shouldn’t prevent the PBOC from easing, said Liu Peiqian, China economist at NatWest Group Plc.

“China’s monetary policy should focus more on domestic challenges, which faces more headwinds from Covid-related lockdowns,” she said. “Therefore I think there is still room for further rate cuts.”

 

The PBOC could use other tools to spur liquidity and economic growth, including lowering the reserve requirement ratio, or the amount of cash banks must hold in reserve. However, the previous two RRR reductions were signaled by the State Council days before the PBOC moved, and since it didn’t flag this tool in its statement Wednesday, there are doubts about an imminent adjustment. 

Analysts at China International Capital Corp Ltd. said a near-term RRR cut seems unlikely as liquidity is sufficient, though the possibility of interest rate cuts cannot be ruled out, and would depend on how the pandemic and economy develops.

Even if the PBOC lowers the RRR in coming months, the room for significant adjustment might be limited. Economists have pointed out that the ratio is already at low levels and is becoming less effective in addressing structural issues. 

“With an increasingly large number of cities under lockdown and amid the downward spiral in the property sector, the impact of incoming monetary easing might be quite limited,” wrote analysts at Nomura Holdings Inc. led by Ting Lu in a research note Thursday. They still think a a RRR cut of 50 basis points is likely in “coming weeks.”

The Nomura economists expect just one rate cut of 10 basis points to the one-year MLF this year. They also forecast similar, one-time cuts to the one-year and five-year loan prime rates, which are seen as the de facto benchmark lending rates in the economy.

NatWest’s Liu said policy makers may also accelerate other measures, such as corporate tax cuts and the issuance of local government bonds.

“Credit demand is weak but the restraints do not only come from monetary policy,” Liu said. “Rate cuts or RRR cuts may help boost lending, but in order to see more sustainable pickup in credit demand, we also expect more fiscal easing, as well as substantial changes to property sector policies or Covid-management policies.”

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