Standard Chartered: The People's Bank of China lowering the relending rate slightly exceeds expectations, but does not indicate a narrowing of future broad-based easing space

Liu Jie, the Chief Strategist for Greater China at Standard Chartered and Head of Rates for Greater China, North Asia, ASEAN, and South Asia, believes that the People's Bank of China (PBOC) has lowered the re-lending and rediscount rates by 0.25 percentage points, which slightly exceeds expectations. This is because typically, the re-lending rate would not be adjusted downward independently without changes to policy rates, such as the Open Market Operations (OMO) or the Medium-term Lending Facility (MLF) rates. The magnitude of this adjustment is also significant. Standard Chartered expects that there will be room for expansion in re-lending tools this year, and rates may be further cut more substantially when OMO rates are lowered.

Liu Jie stated that this is a targeted easing policy by the PBOC, and it does not imply a reduction in the potential for broader easing measures, such as reserve requirement ratio (RRR) cuts or reductions in OMO and MLF rates. The purpose of this measure is to stimulate credit growth without further eroding the net interest margin of the banking sector, and it also aims to lower the overall funding costs for banks.

Data shows that as of March 2025, the balance of the PBOC's structural monetary policy tools was RMB 5.9 trillion, accounting for 13% of its total balance sheet. Although this balance has been declining since the first quarter of 2024, the rate of decline is slower than that of the MLF balance, indicating that the PBOC has begun to shift some loans from the higher-cost MLF to re-lending. Given that the overall funding costs are expected to decrease, this could provide more room for the PBOC to lower OMO rates in the future.

Standard Chartered believes that the Chinese interest rate curve will remain steep, but there is limited room for further increases in bond yields; it maintains its forecast for the first quarter ten-year Chinese government bond yield at 1.9%, expecting it to decline to 1.7% before the end of the year