Shanghai Securities Journal front page article: "Choosing the right time" and "timely" means that reserve requirement ratio cuts and interest rate reductions will land at critical moments

In the past two weeks, the People's Bank of China has held two important meetings, both proposing "timely reserve requirement ratio (RRR) cuts and interest rate reductions." Analysts believe this sends a clear signal of increasing the intensity of monetary policy regulation, and it is expected that there will be substantial RRR cuts and interest rate reductions this year.

As a traditional heavyweight monetary policy tool, RRR cuts and interest rate reductions carry strong signaling significance and notable policy effects. Analysts believe that RRR cuts and interest rate reductions should be used at critical stages to maximize policy effectiveness while also helping to retain policy space.

Combining Policy Effectiveness and Signaling Significance

For some time, there has been a noticeable increase in direct references to RRR cuts and interest rate reductions at the policy level.

In particular, focusing on the monetary policy for the entire year of 2025, the Central Economic Work Conference proposed "timely RRR cuts and interest rate reductions"; the Monetary Policy Committee of the People's Bank of China held its fourth quarter meeting for 2024 at the end of 2024, and the 2025 work meeting of the People's Bank of China held earlier this year both mentioned "timely RRR cuts and interest rate reductions."

Regarding RRR cuts and interest rate reductions, the terms "timely" and "opportunistic" are consistent with this year's policy tone of "implementing a moderately loose monetary policy." "Moderately loose" has been viewed by the market as the most proactive easing monetary policy orientation in recent years.

"Historically, during the phases when the central bank mentions 'moderately loose,' the tools of RRR cuts and interest rate reductions have significantly intensified." Mingming, chief economist at CITIC Securities, stated that the central bank's recent emphasis on "opportunistic RRR cuts and interest rate reductions" indicates that there is room for the use of these two tools, while also reflecting that the timing of their operation may become more flexible.

Wang Qing, chief macro analyst at Dongfang Jincheng, believes that the expression "opportunistic RRR cuts and interest rate reductions" sends a clear signal of increased counter-cyclical adjustments in 2025, and it is expected that the central bank will continue to implement substantial RRR cuts and interest rate reductions this year.

"Overall, RRR cuts and interest rate reductions will, on one hand, drive the growth rates of financial aggregate indicators such as credit, social financing, and broad money (M2), directly increasing financial support for the real economy; on the other hand, they also release a signal of enhanced counter-cyclical adjustments, which helps boost market confidence," Wang Qing stated.

"Opportunistic" Implementation at Critical Moments

"Opportunistic" and "timely" mean that RRR cuts and interest rate reductions will be implemented at critical moments. Wang Qing expects that the central bank will choose to act at key points for implementing counter-cyclical adjustments, guiding social expectations, and regulating market liquidity to carry out RRR cuts and interest rate reductions. This can maximize the effectiveness of policy tools while also helping to retain policy space.

What factors will become important considerations for the timing of RRR cuts and interest rate reductions this year?

"Bank interest margins, the RMB exchange rate, and bond issuance—these three changes constitute the three clues for observing monetary easing at the beginning of the year," stated Tao Chuan, chief economist at Minsheng Securities.

From the perspective of "opportunistic" RRR cuts, Mingming believes that the central bank's main consideration may still be the stable and ample liquidity in the interbank market. Considering the expansion of the deficit ratio, especially the increased supply of special government bonds combined with local debt demands, it is expected that the funding situation may face considerable fluctuations, and the central bank may use RRR cut tools during the concentrated issuance phase of government bonds "The 'good steel' in the reserve requirement ratio cut must be used on the 'blade'," said Zhang Xu, Chief Analyst of Fixed Income at Everbright Securities. Among various tools, the liquidity provided by the reserve requirement ratio cut has the longest duration and the lowest cost, with a significant policy effect that should be utilized at critical stages. For example, during periods of insufficient effective credit demand and weak market expectations, the signaling effect of a reserve requirement ratio cut can help stimulate more credit demand and boost market confidence.

From the perspective of the timing of interest rate cuts, Zhang Yu, Deputy Director of the Research Institute at Huachuang Securities and Chief Macro Analyst, believes that short-term exchange rate fluctuations may be one of the factors considered in the timing of monetary policy under the backdrop of stabilizing market expectations. Historical experience shows that during periods of significant pressure to stabilize the exchange rate, interbank interest rates are more likely to rise than fall.

Implementing Strong Interest Rate Cuts and Reserve Requirement Ratio Cuts

In the short term, some analysts believe there is still a "window period" for a reserve requirement ratio cut in the first quarter. This is because the first quarter is a peak period for credit issuance, and a large-scale release of liquidity through a reserve requirement ratio cut would better support financial institutions in increasing their credit issuance. Guotai Junan Securities predicts that the possibility of a reserve requirement ratio cut in January still exists, mainly considering factors such as increased cash withdrawal demand before the Spring Festival, lower government spending in January, and reserve requirement payments.

Looking at the whole year, Lian Ping, Chief Economist at Guangfa Securities and Chairman of the China Chief Economist Forum, expects a reserve requirement ratio cut of about 1 percentage point in 2025, with interest rate cuts likely to remain in the range of 40 to 50 basis points. It is expected that the central bank will also comprehensively use various quantitative tools such as open market operations and purchasing government bonds to release liquidity, maintain ample liquidity, and meet the expected funding needs for large-scale government bond issuance, as well as the recovery of consumption and expansion of investment.

Author of this article: Zhang Qiongsi, Source: Shanghai Securities Journal, Original Title: "Timing Reserve Requirement Ratio Cuts and Interest Rate Cuts: Monetary Policy Regulation Intensity Expected to Upgrade"

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