The Research Team at Nomura gives the forecast for China’s monetary policy, expecting the country to witness a benchmark rate cut of 25bp in Q2, 2015.
Key Quotes
“China’s monetary policy reacts to a number of indicators, including industrial production (IP ) growth, CPI inflation, capital inflows, effective exchange rate changes and asset price fluctuations (such as housing and stock prices).”
“Our monetary policy signal index is showing a high probability (50-60%) of a monetary policy easing in the form of more traditional policy instruments (e.g. RRR or benchmark rates) in January-February, much higher than the 38% probability it showed in November 2014 when benchmark interest rates were cut.”
“Taking the recent targeted piecemeal easing measures into account, the probability of further policy easing in January-February rises to as high as 70-80%, also higher than the 60% probability forecast for November 2014.”
“The continued rally in the stock market could be a hurdle to policy loosening in the form of more traditional policy instruments, but the strengthened supervision of margin lending should help ease policymakers’ concern that liquidity is fuelling market speculation.”
“The ECB’s QE program is adding further appreciation pressure on the CNY nominal effective exchange rate (NEER), which by constraining exports and adding to disinflationary pressures, further adds to the likelihood of policy loosening in China.”
“The types of monetary policy instruments used will depend on economic and financial conditions. Should net capital inflows surge again, we would expect the probability of four RRR cuts in 2015 (our base view) to fall, but the probability of more benchmark rate cuts to rise (we currently expect one 25bp rate cut in Q2).”
Key Quotes
“China’s monetary policy reacts to a number of indicators, including industrial production (IP ) growth, CPI inflation, capital inflows, effective exchange rate changes and asset price fluctuations (such as housing and stock prices).”
“Our monetary policy signal index is showing a high probability (50-60%) of a monetary policy easing in the form of more traditional policy instruments (e.g. RRR or benchmark rates) in January-February, much higher than the 38% probability it showed in November 2014 when benchmark interest rates were cut.”
“Taking the recent targeted piecemeal easing measures into account, the probability of further policy easing in January-February rises to as high as 70-80%, also higher than the 60% probability forecast for November 2014.”
“The continued rally in the stock market could be a hurdle to policy loosening in the form of more traditional policy instruments, but the strengthened supervision of margin lending should help ease policymakers’ concern that liquidity is fuelling market speculation.”
“The ECB’s QE program is adding further appreciation pressure on the CNY nominal effective exchange rate (NEER), which by constraining exports and adding to disinflationary pressures, further adds to the likelihood of policy loosening in China.”
“The types of monetary policy instruments used will depend on economic and financial conditions. Should net capital inflows surge again, we would expect the probability of four RRR cuts in 2015 (our base view) to fall, but the probability of more benchmark rate cuts to rise (we currently expect one 25bp rate cut in Q2).”
