PBOC Governor: "Core Task Is Stability"... Cautious Stance on Interest Rate Cuts

"Macroeconomic Policy Effects Are Satisfactory"
"Monetary Policy Impact Fully Considered"

Li Gang, Governor of the People's Bank of China, the central bank of China, identified "stability" as the key task for this year. Regarding the possibility of interest rate cuts, he maintained a conservative stance, suggesting that fluctuations would not be significant.

According to local media such as the state-run Xinhua News Agency and the financial media Caixin, Governor Li stated at the "2023 Annual Academic Conference and Financial Forum of the China Finance Society" held on the 4th, "The two core tasks of the People's Bank of China this year are maintaining monetary stability and financial stability." He argued, "If we accomplish this mission, it will promote full employment and economic growth, and further aid China's modernization with Chinese characteristics." He emphasized, "Monetary stability means stability in prices and exchange rates," adding, "The ultimate goal of stable prices and exchange rates is to protect the economic situation of ordinary people and prevent their living conditions from becoming impoverished."

[Image source=Yonhap News]

Governor Li continued, "In recent years, the global economy has faced shocks larger than expected, and there is relatively high uncertainty in the economic environment and policy effectiveness," but stressed, "However, China has always implemented and adjusted cautious monetary policies." He added, "Domestic prices and the yuan exchange rate have been maintained steadily thanks to state-guaranteed supply and stable food and energy prices," and emphasized, "Along with this, maintaining moderate and stable monetary and financial policies is an important foundation for price stability. The overall effect of macro policies has been relatively satisfactory."

Regarding the interest rate cuts recently discussed in the market, he showed a cautious attitude. He mentioned, "(China) has relatively small fluctuations in policy interest rates," pointing out that even during the global interest rate hike trend in early 2018 and the situation after the COVID-19 outbreak in 2020, the People's Bank of China has maintained appropriate interest rates. He explained, "When formulating monetary policy, we fully consider the impact on employment, investment, and the deposit benefits of ordinary people," adding, "For the past 20 years, China's real interest rate has remained at a 'golden rule' level slightly below the potential economic growth rate."

The People's Bank of China effectively froze the Loan Prime Rate (LPR), which serves as the benchmark interest rate, for seven consecutive months last month. The LPR is an average calculated by aggregating the loan rates for the best customers of 18 designated banks, standing at approximately 3.65% for one-year maturity and 4.3% for five-year maturity. The market expects that China, having shifted to a "with-COVID" approach, might lower interest rates to normalize the economy. Regarding liquidity supply measures such as reserve requirement ratio cuts, Governor Li self-assessed, "We have implemented regulations that release frozen liquidity to support stable monetary and credit growth."

On the topic of exchange rates, he stated, "Exchange rates and interest rates do not have a parallel relationship," adding, "Exchange rates influenced by interest rate policies are determined by market supply and demand and expectations." He further emphasized, "This is the reason why the exchange rate mechanism limits the autonomy of monetary policy and causes macroeconomic and financial vulnerabilities."

This content was produced with the assistance of AI translation services.