US Fed’s First Rate Cut in a Decade Provides Room for Chinese Monetary Policy Adjustments

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Chinese analysts expect the first rate cut by the US Federal Reserve in over a decade to give Beijing greater space to manoeuvre when it comes to monetary policy.

On the morning of 1 August the Federal Reserve announced that it would be reducing America’s benchmark interest rate by 0.25 percentage points, for the first cut in 11 years.

Wang Youxin (王有鑫), a researcher with the Bank of China’s International Financial Research Institute, told China’s Financial Times that the start of a downwards cycle in central bank rate adjustments around the world would be of benefit to Chinese monetary policy.

“At this time, global monetary policy is shifting again, and the external constraints on China’s cross-border capital flows and the renminbi exchange rate are weakening,” Wang said.

“[This] provides opportunities for China to adjust monetary policy. In the second half China’s monetary policy will give greater consideration to the real needs of the domestic economy, and adopt more active measures to provide liquidity to the market to ensure stable economic growth.”

Wang Qing (王青), chief macro-analyst with Golden Credit Rating, also believes that a new round of monetary policy loosening as providing greater space for monetary policy adjustments in the second half.

Wang Qing points out that the Chinese purchasing managers index has continued to contract of late, and predicts that downward pressure on China’s domestic economy will remain considerable in the second half, increasing the need for counter-cyclical adjustments to macro-policy.

In future Wang Qing sees the Chinese central bank expanding its implementation of “loose credit,” with the use of structured monetary policy to guide funds towards private enterprise and micro and small-enterprises in the second half.

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