Monetary Policy Outlook: "There is still some room for reserve requirement ratio cuts and interest rate reductions this year" How to trigger

As the January financial data is released and the latest monetary policy implementation report signals new developments, under the tone that “there is still room for reserve requirement ratio cuts and interest rate reductions this year,” the focus of institutions has shifted to how reserve cuts and interest rate cuts will be triggered.

The loan prime rate (LPR) quotations for February will be announced after the Spring Festival holiday. Since the 7-day reverse repurchase rate, a key policy rate, has remained unchanged since its adjustment in May 2025, the market expects the February LPR quotations to stay steady. The last adjustment to the LPR was in May 2025, with both the 1-year and over 5-year LPRs lowered by 10 basis points.

In the monetary policy implementation report for the fourth quarter of 2025, the central bank stated that it will continue to implement a moderately easing monetary policy. It emphasizes promoting stable economic growth and reasonable price increases as key considerations, adjusting policy strength, pace, and timing based on domestic and international economic and financial conditions and financial market operations. The report advocates flexible and efficient use of various policy tools such as reserve requirement ratio cuts and interest rate reductions to maintain ample liquidity and relatively loose social financing conditions, guiding the reasonable growth of total financial volume and balanced credit deployment, aligning social financing scale and money supply growth with economic growth and inflation expectations.

CITIC Securities pointed out that in terms of monetary policy tone, the central bank continues the stance from the Central Economic Work Conference of “continuing to implement a moderately easing monetary policy,” while emphasizing the flexible and efficient use of tools like reserve requirement ratio cuts and interest rate reductions. However, it did not signal a stronger stance toward broad easing. Notably, the report changed the goal from “promoting a decline in overall social financing costs” in Q3 to “keeping social financing costs at low levels,” possibly indicating concern over bank net interest margin pressures. Data from the report shows that as of December 2025, the weighted average interest rate on new loans in China had fallen to 3.15%, a historically very low level. The report states that policy implementation should be based on domestic and international economic and financial conditions and market operations. The institution suggests that the conditions for interest rate cuts might include further slowing of economic growth momentum or financial market volatility.

Wen Bin, Chief Economist at China Minsheng Bank, pointed out that regarding reserve requirement ratio cuts, a press conference by the State Council on January 15, 2026, indicated that the average statutory reserve ratio of financial institutions is currently 6.3%, leaving room for further cuts. Going forward, supporting fiscal efforts, stabilizing bank liabilities, and deepening long-term liquidity release through increasing MLF and reverse repurchase balances to ease the central bank’s ongoing pressure are necessary. Currently, the central bank’s combined use of 7-day and 14-day reverse repos, outright repos, MLF, and government bond trading, with short-, medium-, and long-term tools tailored to market demand, can effectively meet liquidity needs and stabilize interest rates. Therefore, the probability of a reserve requirement ratio cut in the short term is low. As for interest rate cuts, the constraints from exchange rate stability and interest rate spreads have eased, and with large-scale long-term deposit re-pricing and reductions in various re-lending rates in 2026, the cost of liabilities has decreased, creating some room for rate cuts. However, considering that a structural interest rate cut was already implemented in January and the stock market continues to perform well, the need for a short-term rate cut is also limited.

Wen Bin also noted that the Q4 monetary policy report mentioned “based on domestic and international economic and financial conditions and financial market operations, grasping the policy implementation’s strength, pace, and timing,” indicating that monetary policy remains flexible and responsive, with broad easing requiring certain triggers. Future implementation of reserve requirement ratio and interest rate cuts may depend on clear signals such as further economic slowdown risks, unexpected external shocks, or abnormal financial market fluctuations.

Zheshang Securities believes that for future monetary policy, economic growth and promoting reasonable price increases will be the key considerations throughout 2026, while also maintaining financial stability. Looking ahead to 2026, from the perspective of promoting reasonable price increases, it is expected that there will be a total easing of 25-50 basis points through reserve requirement ratio cuts and 10 basis points through interest rate reductions, with a gradual pace and not too frequent adjustments. Additionally, structural policy tools are expected to continue exerting influence, with a focus on guiding credit structure, expanding domestic demand, supporting technological innovation, and small and micro enterprises.

(Source: The Paper)