The Chinese yuan is trading relatively flat against the US dollar and the euro to kick off the trading week. The yuan has strengthened considerably this year, but the currency has been struggling to find direction over the last month as stagflation fears intensify and questions surrounding stimulus efforts becoming more widespread. The People’s Bank of China (PBoC) may have an answer.
On Monday, the central bank left its one-year Loan Prime Rate (LPR) at 3.85% and the five-year LPR at 4.65%. This was widely anticipated, although market analysts anticipated that the institution could introduce a cut to the reserve requirement ratio (RRR).
Does this mean policymakers will remain quiet on monetary policy? Not exactly.
In its latest quarterly monetary policy report, the PBoC signaled potential easing measures in the months to come following an economic downturn. The central bank ditched several key phrases from its policy outlook, such as “control the valve on money supply” and promising not to “flood the economy with stimulus.” Instead, officials inserted the term “normal monetary policy.”
“We expect Beijing to soon significantly step up its monetary easing and fiscal stimulus to counteract the increasing downward pressure,” Nomura’s Lu Ting wrote in a Sunday note.
Meanwhile, speaking in an online forum Sunday, Liu Shijin, a member of the PBoC’s Monetary Policy Committee, warned that the world’s second-largest economy could be on the brink of “quasi-stagflation.”
He added that the country needs to be prepared for the end of “some bubbles,” adding that it is “hard to avoid” these situations.
Some forecasts are anticipating growth in the gross domestic product (GDP) to slip below 5% next year.
“While investors’ expectation for near-term monetary easing is low, our view is that the People’s Bank of China needs to take action to cushion the economy’s slowdown. We maintain our call for a 50-basis-point cut in banks’ required reserve ratio in the coming months,” said David Qu, Bloomberg Economics China Economist, in a note.
The USD/CNY currency pair dipped 0.08% to 6.3823, from an opening of 6.3872, at 12:52 GMT on Monday. The EUR/CNY tumbled 0.11% to 7.1970, from an opening of 7.2108.