With officials still reluctant to countenance broad-based, “kitchen sink” stimulus, some worry stagflation is imminent.
Late last month, Beijing disappointed the market by keeping the loan prime rate unchanged at 4.2%.
Technically, the LPR – which was revamped in August – is compiled using submissions from 18 banks, but the PBoC can steer it, just like the authorities can steer everything else in China.
LPR fell in September and also in August, the first month using the revamped calculation.
As noted last month, the fact that the PBoC didn’t guide LPR lower in October suggested China was being especially judicious about how and when they fire their easing bullets.
The latest broad RRR cut came in early in September. Two targeted cuts were announced at the same time. The across-the-board reduction went into effect on September 16.
Two weeks back, we reminded readers that China would likely cut the medium-term lending facility rate when some 400 billion yuan in loans came due in early November.
On Tuesday, China did just that, offering 400 billion yuan in one-year MLF at 3.25%, representing a 5bps cut from 3.30%. (There was actually a net liquidity drain as 403.5 billion yuan in MLF loans matured.)
As a reminder, the bank submissions for the loan prime rate mentioned above represent the prices they charge their most credit-worthy clients expressed in basis points over open market operation rates, with an emphasis on MLF. So, today’s MLF cut ostensibly opens the door to an LPR cut later this month.
It’s a small step down the road to more easing at a time when the data continues to underwhelm.
Although the Caixin PMI has perked up considerably, the official gauge is still mired in contraction. September’s activity data was better than expected, but remains subdued. Overall, the world’s second-largest economy grew at the slowest pace in three decades in the third quarter.
With officials still reluctant to countenance broad-based, “kitchen sink” stimulus to boost the economy, some commentators are beginning to raise the specter of stagflation.
After all, CPI is rising briskly on the back of exploding pork prices, while factory gate prices are stuck in deflation. That presents policymakers with a dilemma. Aggressive monetary easing could exacerbate the CPI gains, in addition to feeding the type of speculation and leverage that authorities have been keen to stamp out over the past several years.
The latest read on CPI and PPI is due later this week, as is October trade data.
(Source: Heisenberg Report)
