The People’s Bank of China (PBOC) is considering a significant shift in its monetary policy, potentially leading to multiple interest rate reductions in 2024. This potential shift comes in response to the US Federal Reserve’s aggressive stance on interest rates amidst growing recession fears.

Recent actions by the PBOC, including a surprise interest rate cut two weeks ago, suggest that more easing measures are in the pipeline. Economists predict up to three rate cuts this year, a level of easing not seen in recent years. Xu Yongbin, co-chief investment officer of U-Shine Private Equity FD Mgt Co, believes the PBOC could cut rates as early as September, depending on economic conditions.

China’s central bank has been navigating a difficult balancing act, addressing domestic economic needs while managing the impact of US monetary policy on the yuan. The PBOC had previously maintained steady rates to defend the yuan against a rising Fed rate and capital outflows. However, a recent rally in the Treasury market has eased pressure on the Chinese currency, providing some room for maneuver for the PBOC.

Market expectations are that the Fed will cut rates by at least a full percentage point by the end of the year, with potential cuts beginning in September. This development could alleviate some of the PBOC’s concerns and allow it to prioritize stimulating the Chinese economy.

Recently, the gap between US and Chinese 10-year government bond yields has narrowed, making Chinese bonds relatively more attractive. This shift has prompted analysts to anticipate a potential PBOC action. Macquarie Group Ltd. predicts at least two rate cuts by the PBOC in the remainder of 2024, exceeding previous expectations.

The PBOC’s recent easing measures, including a reduction in the seven-day rate and adjustments to the one-year policy loans, indicate a shift in policy focus. Previously, economists did not expect further cuts through the end of the year, but this outlook has changed based on new data.

Bloomberg Economics notes that waning concerns over yuan depreciation, particularly with anticipated US rate cuts, could clear the path for the PBOC to implement further reductions in support of China’s recovery. Chang Shu and David Qu of Bloomberg Economics emphasize that the economy requires more stimulus, and more aggressive rate cuts could be part of the solution.

Despite these potential moves, the PBOC faces challenges. Past rate cuts have had a limited impact on boosting demand in the face of a persistent housing downturn and weak job market. Additionally, commercial lenders’ narrow profit margins and the limited effectiveness of previous rate cuts add to the complexities of the situation.

The PBOC’s decisions will ultimately be driven by domestic economic needs, rather than solely by the Fed’s rate moves. If a global recession triggered by a hard landing in the US materializes, the resulting risk-averse sentiment could strengthen the dollar, putting additional pressure on the yuan and potentially limiting the PBOC’s policy options.

Standard Chartered’s Ding Shuang maintains a cautious outlook, predicting a 10-basis point cut to the seven-day reverse repo rate in the fourth quarter of this year and the first quarter of 2025. The one-year policy loan rate could experience a larger reduction. Ding highlights that if the property sector stabilizes next year and the US experiences a soft landing, China may not need to align perfectly with the Fed’s rate-cutting trajectory.