Morning Brief – Wrong direction

Wrong direction

 

Virtually the entire world is hiking interest rates in a bid to combat inflation in their economies. If you plot the action of central banks so far this year on a world map two areas stand out as exceptions. A handful of countries in central Africa who have either held constant or marginally cut rates so far this year and an enormous swathe of Asia. Take a closer look and that Asian anomaly is China. The People’s Bank of China, the central bank and monetary policy setting authority in the hugely economically significant territory of China, surprised markets on Monday. Whilst everyone around them was hiking interest rates to avoid the price level spiralling out of control, they took a very different policy.

 

The PBoC cut one of the interest rate benchmarks in its economy by 10 basis-points. This provided a boost to domestic equities and created a supportive tone in wider markets. However, despite coming as a shock decision, rebalancing against the rest of the globe, sceptics on the Chinese economy still described the move as too little too late. There is a sign that the domestic authorities in China may be open to further monetary loosening with state-affiliated news outlets sharing analysts’ opinions that there is more to do to encourage growth at the central bank level.

 

Accordingly further cuts are being priced into the curve of fixed income durations with the key lending benchmark set to come into focus next Monday with another potential loosening of policy. Monetary accommodation in China is of course pursued domestically in the name of promoting growth. With financial leverage in focus in China following the near collapse of the property market post-Evergrande, monetary caution is also advisable. Due to China’s position as a powerhouse of global trade, spill over effects could also be welcomed across the globe. For example, such moves could contribute to an easing of risk conditions and provide further fuel to the peak-Dollar narrative.

 

 

 

Discussion and Analysis by Charles Porter

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