(Bloomberg) -- China’s central bank has signaled that lowering the amount of money lenders must keep in reserve remains on the table this year, in comments by an official with a track record of telegraphing such moves.
Zou Lan, head of the central bank’s monetary policy department, said there’s still space for more cuts considering the average reserve requirement ratio for financial institutions is at about 7%. But he also cautioned over constraints on decreasing deposit and lending rates further due to narrowing bank profit margins and money flowing into asset management products.
“For rate reductions and other policy adjustments, it’s necessary to observe the trend of the economy,” he said Thursday, in response to a question on whether the People’s Bank of China saw the need to cut policy interest rates or the RRR again this year.
The latest guidance from the PBOC follows a string of interest-rate cuts in recent months to stimulate an economy that expanded at the slowest pace in five quarters. Risks to the outlook are increasing as export growth unexpectedly slowed in July while domestic consumption remains sluggish.
Zou made similar public comments last January and in July 2023, days before the central bank acted to reduce the RRR. China last announced a change to the reserve requirement in January, when PBOC Governor Pan Gongsheng unveiled a 50 basis-point reduction during a live press briefing.
“The effect of the policy of lowering the reserve requirement ratio at the beginning of the year is still showing,” Zou said Thursday at a press conference in Beijing.
Analysts have been forecasting further rate cuts and a reduction to the RRR, with September seen as a potential window.
Zou described the RRR as a tool for supplying long-term liquidity and said the seven-day repo rate and medium-term lending facilities are instruments for managing short- and medium-term liquidity fluctuations.
“The seven-day reverse repo rate is now the official policy rate, Zou said, the first official confirmation of the change.
“This year, we have added the tool to buy and sell government debt,” he said. “The comprehensive use of these tools is aimed at maintaining reasonable and abundant liquidity in the banking system.”
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