China has both room and growing necessity to cut interest rates in the coming months, as top policymakers step up efforts to stabilize growth amid weakening economic momentum, analysts said.
Song Yu, chief China economist at UBS Securities, said that with top policymakers placing greater emphasis on stabilizing growth to ensure a solid start to the 15th Five-Year Plan (2026-30) period, monetary conditions are likely to remain accommodative in the coming months, with ample market liquidity and low interbank funding rates.
Song said China still has room to cut interest rates and the RRR — the proportion of deposits banks must keep in their vaults as reserves — in the coming months to lower financing costs for businesses, and such tools may be deployed in a flexible, data-based manner.
"While uncertainty over the US Federal Reserve's policy path remains elevated, past experience suggests that China's cross-border capital flows and exchange rate are primarily determined by domestic economic and market conditions, rather than the interest rate differential with overseas markets," Song said, adding that the inflation outlook also strengthens the necessity for easing.
"As imported inflationary pressure from international oil prices recedes, China's consumer inflation is expected to soften in the coming months, leaving ample room for monetary easing and potentially reinforcing the need for additional policy support to stabilize prices and bolster domestic demand."
