Beijing is tipped to drastically relax monetary policy for banks by 200 basis points (bps) as the nation faces slowdown in growth, due to a pause in housing construction and a decline in the consumer price index inflation.
Nomura forecasts two reserve ratio requirement (RRR) cuts in the first quarter of next year; with each round shedding 50bps respectively. The bank expects another 50 bps of rate cuts in the second and third quarter as well.
“We do expect policy to loosen,” said Zhiwen Zhang, a Hong Kong-based chief China economist at Nomura at a media briefing yesterday (December 13). “Growth is clearly slowing down and the trend is on the downward.”
As a result of the mainland’s policy loosening, this will ease credit strains and boost the economy. Nomura foresees loan supply to reach Rmb8 trillion (US$1.26 trillion) next year, up from this year’s Rmb7.3 trillion.
The bank also predicts that the People’s Bank of China (PBoC) will cut interest rates by 25 bps in the first quarter of 2012.
The central bank has already taken one step in loosening the monetary purse-strings on November 30 lowering the bank RRR for the first time in almost three years.
The 50bps cut took the ratio to 21% for large lenders and 17.5% for small and medium-sized lenders, unlocking about Rmb400 billion in deposits into the banking system that can now be used to create loans.
Nomura forecasts inflation to stand at 3-3.5% in the first half and 4.5% in the second half of next year.
“We do believe that China faces inflationary pressures beyond 2012 driven by supply side factors such as wage growth and other resources becoming more expensive,” said Zhang.