PBOC not tying its own hands with forward guidance

PBOC Governor Yi Gang today appeared to pour cold water on the prospect of imminent monetary easing. He said that the PBOC would not rush to follow the US Fed and ECB in cutting rates and that “China’s monetary policy will maintain its prudent orientation”. But we wouldn’t put much weight on this comment. Monetary policy has officially been designated “prudent” in China since 2011 (before that it was officially “moderately loose” rather than imprudent). A “prudent orientation” has been maintained through both tightening and loosening cycles. And over that time, significant loosening of monetary conditions has often been preceded by PBOC statements that policy would remain unchanged. As such, Yi Gang’s comments don’t alter our view that the PBOC will loosen policy more aggressively than most expect in the coming months in the face of slowing growth and a weaker monetary transmission mechanism (on the latter point, see our recent Update).