Is there still room for interest rate cuts and reserve ratio reductions this year? And what are the odds of such measures being implemented? On September 5th, Zhou Lan, Director General of the Monetary Policy Department of the People's Bank of China (PBOC), stated during a press conference held by the State Council Information Office that the prudent monetary policy has fostered a favorable monetary and financial environment for economic recovery and development. Going forward, adjustments such as reserve ratio cuts and interest rate reductions will require continued observation of economic trends.

       Presently, the Purchasing Managers' Index (PMI) for manufacturing, prices, real estate investment, and sales are all contracting, highlighting an urgent need for monetary policy to step up and implement more forceful countercyclical adjustments. Predictions regarding reserve ratio cuts and interest rate reductions have thus become a matter of heightened attention in the market.

       Zhou Lan indicated that adjustments such as reserve ratio cuts and interest rate reductions would necessitate further monitoring of economic trends. Among these tools, the statutory reserve requirement ratio serves as a means to provide long-term liquidity, whereas the 7-day reverse repurchase operations and Medium-term Lending Facility (MLF) are geared towards managing short- to medium-term liquidity fluctuations; this year also saw the addition of treasury bond trading tools. The concerted use of these instruments aims to maintain a reasonable and ample liquidity level in the banking system. The effects of the reserve ratio cut at the beginning of the year are still unfolding, with the current average statutory reserve requirement ratio for financial institutions standing at around 7%, suggesting there remains room for adjustment.

       Ma Ruiwei, Professor of Finance at the School of Economics, Beijing Technology and Business University, told the reporter from International Business Daily that a 7% average statutory reserve requirement ratio implies that the central bank still possesses room for further cuts. If each reduction is by 0.5 percentage points, multiple cuts could potentially occur in the future, with the market anticipating at least four more cuts.

       Regarding the timing of such cuts, industry analysts predict that, given some legal person financial institutions with a 5% reserve requirement ratio were not included in previous cuts, this likely signifies a lower limit of 5% for the current reserve requirement ratio, indicating a remaining 2 percentage point reduction potential. Considering the ample liquidity currently in the banking system, reserve ratio cuts are likely to be scheduled for the fourth quarter of the year.

       Amidst global monetary policy turmoil, China's scope for interest rate cuts is also under scrutiny. In terms of interest rates, the one-year and five-year prime lending rates have cumulatively decreased by 0.1 and 0.35 percentage points respectively this year, driving down average loan interest rates.

       Zhou Lan noted that factors such as the pace at which bank deposits are shifting to asset management products and the narrowing of banks' net interest margins are constraining further declines in deposit and lending rates. The People's Bank of China will closely monitor the effects of these policies, adjusting the intensity and pace of monetary policy according to economic recovery progress, target achievements, and specific issues facing the macroeconomy.

       Ma Ruiwei opines that while there are constraints on the likelihood of interest rate cuts, growing expectations for Federal Reserve rate cuts globally could open up space for China to follow suit. Overall, the probability of reserve ratio cuts and interest rate reductions within the year is relatively high, with the specifics of such moves hinging on the pace of economic recovery.

       Furthermore, Zhou Lan pointed out that the central bank will work to further refine the market-based interest rate control mechanism in the future. This involves appropriately narrowing the width of the interest rate corridor to better guide market interest rates to operate smoothly around the policy rate. Meanwhile, in terms of interest rate transmission, the focus will be on enhancing the quality of Loan Prime Rate (LPR) quotations, improving financial institutions' autonomous pricing capabilities, and more accurately reflecting loan market interest rates, thereby facilitating a smooth transmission of market rates from short to long term.

       Discussing the policy orientation going forward, Deputy Governor of the central bank, Lu Lei, stated that the People's Bank of China will persist in adopting supportive monetary policies, accelerating the implementation of already announced policy measures, and providing stronger support for high-quality economic development. The focus will be on three aspects: aggregate quantity, interest rates, and structure.

       In terms of aggregate quantity, a variety of monetary policy tools will be employed comprehensively to maintain reasonable and ample liquidity, guiding banks to enhance the stability and sustainability of loan growth, and ensuring that the scale of social financing and money supply align with the expected targets of economic growth and price levels. On interest rates, the recent downward adjustments in policy rates and LPR will be leveraged to drive a steady yet moderate decrease in corporate financing costs and household credit expenses. As for structure, efforts will be intensified to implement existing tools and facilitate the implementation of newly established ones, primarily aimed at enhancing the efficiency of fund usage and increasing the provision of high-quality financial services to major strategies, key areas, and vulnerable links.