Jerome Powell deserves a heartfelt thank you from President Xi Jinping. The benchmark interest rate was lowered by 50 basis points on Wednesday in the direction of the US Federal Reserve chair. The central bank claimed that this was mostly because of "greater confidence" that the rate of inflation in the United States was returning to the target range. However, the action also lessens the yuan's pressure to depreciate, allowing the People's Bank of China to better support its own economy.
Since the US began rising rates in March 2022, the PBOC, which is mandated by law to preserve currency stability in order to promote economic growth, has been attempting to establish a floor beneath the dropping yuan. The growing expectations that the Federal Reserve would soon blink led to the Chinese currency's real appreciation, which has now increased by almost 2.5% versus the US dollar since July.
In the meantime, the possibility of economic growth falling short of Beijing's "around 5%" 2024 target has been increasing. Recent figures support that: despite the peak of summer tourism, sales at retail in China increased by just 2.1% in August, compared with a 2.7% growth in the same month last year. Property investment fell by a further 10.2% in the first eight months of this year as compared to the same timeframe in 2023, indicating that the home market downturn is still ongoing. Numerous investment banks have lowered their full-year GDP growth predictions for China as a result of such weakness.
With the Fed's bigger-than-expected cut, the PBOC can now concentrate on lowering the cost of borrowing, assisting Xi in reaching the GDP target. When the central bank sets loan prime rates on Friday, it might be the first step in the process. There is also a strong expectation that the PBOC will lower the interest rates on current mortgages. This could contribute to the further deflation of the bond bubble that has caused rates to drop to all-time lows and that authorities have been battling for months.
Earlier this month, a prominent PBOC official stated that there is potential to reduce the minimum reserve ratio required of banks in order to provide liquidity. In order to assist local governments in purchasing unsold property inventories to convert into affordable housing, the central bank may even expand the size of a loan program.
Senior economic officials from the United States and China will get together once more in Beijing on Thursday to talk about a variety of topics, including industrial overcapacity and collaboration on financial stability. The timing of the Fed's interest rate decision, which was made just hours before the meeting, could not have been more ideal.