More room seen for interest rate cuts

China's central bank will have more room to inject liquidity and lower the major interest rates to cushion any financial volatility and stimulate the economy, as domestic consumer inflation pressure eased and the global economy is predicted to suffer a deep recession this year amid the COVID-19 pandemic, economists said.

A deeper decline in factory production and slower gains in consumer prices in May indicated that demand in the world's second-largest economy remained weak, leaving policymakers more space to implement stimulus policies to offset the impact of the pandemic, they said.

Policy advisers expected that the People's Bank of China, the central bank, will add liquidity via reserve requirement ratio cuts, and continue to leverage various lending facilities, such as the medium-term lending facility, relending and rediscounting.

"Cutting the RRR is necessary, as the borrowing costs in the interbank system have risen recently and the small and medium-sized banks still need cheaper funds to increase credit for the real economy," said Lou Feipeng, a senior economist at Postal Savings Bank of China.

Reducing interest rates, including the benchmark lending and deposit rates, is also possible, to maintain lower financing costs and support the issuance of government bonds, said Lu Ting, chief China economist at Nomura Securities.

Chinese commercial banks provided more than 10 trillion yuan ($1.41 trillion) of new loans in the first five months to cushion economic shocks triggered by the novel coronavirus. The smaller lenders, however, may face the strain of rising non-performing loans in the second half, and special policy tools are needed to prevent large profit drops in the banking sector, advisers said.

Officials from some local governments told China Daily that they are planning to use a part of the funds raised by special local government bonds to replenish the capital of small and medium-sized local banks, a bailout measure to save them from tight financial conditions. The proposals have been submitted and are awaiting approval, they said.

The International Monetary Fund expects to further revise its forecast for the global economy this year to indicate a worsening of the situation from its April forecast of a 3 percent contraction, IMF Managing Director Kristalina Georgieva said on Saturday.

A new outlook will be released on June 24 and is expected to reflect extremely challenging conditions as the real economy is hit hard by the pandemic, Georgieva said in a speech posted on the IMF's website.

Current economic projections suggested the deepest global recession since the end of World War II－a 5.2 percent contraction of global GDP this year, with the largest number of economies experiencing declines in per capita output since 1870, the World Bank said last week.

The gloomy outlook and the risk of a possible second wave of the novel coronavirus outbreak may increase global financial market fluctuations, and this may influence Chinese investors' sentiment. "Releasing more monetary easing signals to stabilize market expectations is necessary in the short term," said Ming Ming, a senior analyst at CITIC Securities.

A stock market sell-off, sparked by renewed fears over the impact of the COVID-19 pandemic, reappeared in the United States last week, recording the sharpest weekly losses since March. Analysts said that should serve as a reminder that the world is still in the middle of a global health crisis.

The US Federal Reserve predicted on Wednesday that it would keep interest rates close to zero until at least the end of 2022, as the US would take years to bring joblessness back down to the levels before the COVID-19 pandemic and the US economy may contract by 6.5 percent this year, according to the economic projections on the Fed's website.

"The dovish policy stance of the Fed will also help to increase the flexibility of China's monetary policy, reducing constraints on cutting the benchmark interest rates, including the deposit rates," said Lou from Postal Savings Bank of China.

Consumer inflation, indicated by the consumer price index, eased to a 14-month low of 2.4 percent in May, down from 3.3 percent in April, and the producer price index, which measures factory-gate prices, dropped by 3.7 percent from a year earlier, according to the National Bureau of Statistics.