Why the People’s Bank of China is unlikely to raise interest rates next year

On the domestic front, the Chinese economy is not out of the woods yet and there is also the risk of disinflation

From a global perspective, loose monetary policy by central banks in the West would result in yuan appreciation were the PBOC to raise interest rates

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Yi Gang, governor of the People’s Bank of China, gestures during an interview in Beijing on June 7, 2019. Photo: Bloomberg

Published: 3:30am, 2 Dec 2020Updated: 3:46am, 2 Dec 2020

With China’s economic recovery gaining more traction, the market has started to speculate that the central bank will raise interest rates next year. This expectation is already reflected in the interest rates derivatives market where we can see a steepening curve.

Typically, this kind of steepening suggests that a tightening cycle is under way. Given that an interest rate rise is a typical way to tighten monetary policy, how likely is it that the People’s Bank of China will raise interest rates next year?

My answer is “unlikely”. There are several reasons for this. First, while the Chinese economy has been leading the global post-Covid-19 recovery, China’s growth momentum is set to decelerate in the coming quarters.

The Chinese economy has largely returned to its pre-virus level since the second quarter. Therefore, it makes more sense to expect a more organic growth trajectory going forward.

In fact, China’s third quarter gross domestic product growth was already below market expectations, indicating that the market might have taken an overly optimistic view of China’s recovery.

Somewhat alarmingly, the sectors benefiting from the global disruption of supply chains might witness a significant slowdown when the pandemic is under control. For example, China’s share of global exports has climbed in recent months as many countries were unable to produce at full capacity during lockdowns.

Why the People’s Bank of China is unlikely to raise interest rates next year

On the domestic front, the Chinese economy is not out of the woods yet and there is also the risk of disinflation From a global perspective, loose monetary policy by central banks in the West would result in yuan appreciation were the PBOC to raise interest rates

On the domestic front, the Chinese economy is not out of the woods yet and there is also the risk of disinflation

From a global perspective, loose monetary policy by central banks in the West would result in yuan appreciation were the PBOC to raise interest rates