The People’s Bank of China (PBOC) has indicated potential for further reductions in both key interest rates and banks’ reserve requirements, alongside a targeted move to spur economic activity by lowering the cost of structural lending instruments.
Speaking on Thursday, PBOC Deputy Governor Zou Lan stated that policymakers see “some space” to decrease the reserve requirement ratio as well as policy rates this year.
Effective from Monday, the central bank will cut interest rates on structural monetary policy tools by 0.25 percentage points, including reducing the one-year rate attached to relending facilities from 1.5% to 1.25%. These actions underscore the PBOC’s preference for calibrated, selective measures intended to counter subdued demand and longstanding economic imbalances.
The central bank introduced only a single 10-basis-point cut to its policy rate in 2025, well below market forecasts of 40–60 basis points. Zou explained that improved net interest margins for banks now provide room for additional policy rate reductions, though a specific timeline was not given.
Commenting on recent currency movements, Zou argued that China does not require a yuan depreciation to boost export competitiveness. He attributed the currency’s recent strength to a weaker U.S. dollar and easing geopolitical tensions between Beijing and Washington, rather than any underlying policy shift.
The yuan has surpassed the symbolic seven-per-dollar mark last month for the first time since May 2023, propelled by a softer dollar, China’s large trade surplus, economic improvement, the central bank’s acceptance of a stronger currency, and capital inflows prior to the Lunar New Year.
The PBOC is determined to avoid excessive volatility and will maintain the yuan at “a reasonable and balanced” level, according to Zou. He noted the currency has proven “basically stable” in recent years and reiterated that market forces would remain central in setting the exchange rate.
For inflation, greater emphasis is placed on ensuring a “reasonable recovery in prices” during 2026, as policymakers seek to overcome deflationary risks that have weighed on economic growth. The PBOC also intends to expand its government bond market operations to fine-tune liquidity management amid a challenging international landscape.
Additionally, the central bank will launch a dedicated relending program supporting private enterprises and will increase quotas for technology innovation loans. Plans are also set to inject another 500 billion yuan in lending for small businesses and the agricultural sector.
