China’s central bank will keep its benchmark interest rate at a record low through 2018 even as economic growth continues to grind lower, according to UBS Group AG.
Any pressure to raise interest rates will be capped by slowing economic growth and mild consumer inflation pressures, while the downside will be limited by the People’s Bank of China’s concerns about asset price bubbles and yuan depreciation pressures, head of China economic research Wang Tao wrote in a report Thursday. The PBoC will keep using other liquidity tools instead of the required reserve ratio to manage liquidity and money supply, she wrote.
Growth in the world’s second-largest economy will slow to 6.4% next year and 6% in 2018 as construction and related investment decelerate further amid a property downturn, Wang said. A modest export recovery and government-led infrastructure investment will help offset the slowdown, along with fiscal support, and consumption should remain resilient even though it may slow slightly on weaker income growth, she said.
Meanwhile, the yuan, already trading at an eight-year low, will continue to weaken. UBS projects it will fall to 7.2 per dollar at the end of next year and 7.5 by the end of 2018 amid constant capital outflows and as monetary policy continues to diverge from the US.
Analysts have been dialling back forecasts for additional monetary stimulus, with some betting on a switch to tightening mode after the central bank’s two-year easing regime. The PBoC will make its next broad move by guiding interest rates through a corridor, rather than the traditional approach of changes to benchmark lending and deposit rates, according to a Bloomberg survey of economists in September. China International Capital Corp economist Liang Hong said in a briefing with reporters this month that the next PBoC rate move will be a hike, not cut.
This week, the official Xinhua News Agency said the likelihood of a rate or RRR reduction by year end is “low.” The central bank is expected to maintain prudent monetary policy through year end, the state-run news agency reported.