PBoC won’t cut rates to ease deflationary pressure on firms
The central bank (PBoC) sees no need to cut interest rates to relieve deflationary pressure on firms.
That’s according to Zou Lan, head of the PBoC's monetary policy department in comments made Thursday.
Some context: Despite benchmark lending rates declining twice last year, persistent producer price deflation means companies' real cost of borrowing is doggedly high.
- Some government advisors have called for aggressive rate cuts to provide relief.
Zou said interest rate pressure isn’t universal, noting that prices are rising in industries like service entertainment – where demand is strong – keeping real rates low.
Moreover, in sectors struggling with deflation – like steel – high funding costs serve a purpose.
- “A slightly higher real interest rate will help companies control production capacity and reduce inventory.”
Zou also said he expects inflation to rise soon.
- “Aggregate demand is expanding, and the foundations for price recovery are in place.”
- “The prices of some agricultural products have reached an inflection point, and tourism has become more active.”
- “These factors will help prices recover…[and] real interest rates will change accordingly.”
Zou said nominal rates must be kept at a reasonable level to avoid:
- “Reducing the impetus for structural adjustment”
- Feeding speculative investments
- Putting downward pressure on prices, presumably as a result of overcapacity
Our take: We previously expected the one-year loan prime rate – banks’ benchmark for pricing corporate loans – to decline at least 20 bps this year.
- We’re now less certain.