By Kevin Yao
BEIJING (Reuters) – China’s central bank is expected to take more monetary easing measures, pressured by a shaky economy that is hurting jobs but faces limited room to maneuver due to concerns about rising inflation and capital flight, they said. sources with knowledge of monetary policy and analysts.
Analysts expect cuts in the country’s benchmark lending rates as early as Monday after the People’s Bank of China unexpectedly cut two key rates this week after data showed the economy slowed in July.
But the institution is walking a tightrope — seeking to support the Covid-ravaged economy but avoiding massive stimulus that could add to inflationary pressures and risk cash outflows from China’s stock and bond markets as the Federal Reserve and central banks other economies aggressively raise their own interest rates.
China’s economy narrowly avoided a contraction in the second quarter amid widespread lockdowns and a deepening housing crisis, which have severely dented consumer and business confidence, while Covid cases have surged again in recent weeks. Nomura estimates that 22 cities are currently in full or partial lockdowns, representing 8.8% of Gross Domestic Product (GDP).
“Currently, the main problem facing China is slowing economic growth, protecting growth is the top priority,” Yu Yongding, an influential government economist who has advised China’s central bank, told Reuters.
“What we must do is continue to pursue expansionary fiscal and monetary policy, including interest rate cuts,” he said.
China is likely to cut its base lending rate for businesses and home buyers at its next rate meeting on Aug. 22.
“The rate cut is not enough – we must step up easing,” said a government adviser who spoke on condition of anonymity.
However, the central bank is unlikely to reduce banks’ reserve requirements, a traditional tool to boost liquidity, as the financial system is already awash with cash, China observers said.
The institution can instead use structural monetary policy tools, such as low-cost loans, to provide targeted support to small businesses and struggling sectors favored by state policies, they said.
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