Investing.com -- China’s central bank appears to be shifting its monetary policy stance toward accommodation, with Citi forecasting a 50 basis point reserve requirement ratio (RRR) cut in Q2 2025 and a 20 basis point rate cut in Q3 2025.
“We still expect a 50bps RRR cut in 25Q2E and a 20bps rate cut in 25Q3E,” the bank stated in a note Tuesday. Citi explained that the People’s Bank of China (PBoC) recently fine-tuned its Medium-Term Lending Facility operations, injecting RMB450 billion into the system.
While the liquidity impact was said to be largely neutral, the bank believes the move could be seen as a minor de facto rate cut and a signal that monetary policy is turning away from its hawkish bias.
"Despite a solid opening of the year, growth headwinds are likely to accumulate in Q2 2025," Citi noted.
The firm pointed to external risks, including the potential for increased U.S. tariffs on China as key factors that could prompt further policy support.
Should downside risks materialize, Citi expects China’s policymakers to step up measures to maintain the economy’s growth target of around 5%.
The bank believes the PBoC will likely cut its relending rate if necessary, following a previous cut in January 2024.
They add that with this shift, the Medium-Term Lending Facility is no longer China’s primary policy rate, marking a structural change in the country’s interest rate framework.
Citi noted that China’s monetary system now resembles those of developed markets, with the 7-day reverse repo rate serving as the short-term policy benchmark.
On the fiscal side, the bank highlighted that government bond issuance surged to RMB2.8 trillion in the first two months of 2025, with the deficit hitting -0.4% of GDP, the most expansionary level on record for this period.
However, Citi warned that weak tax revenues and declining land sales revenue could pose fiscal challenges going forward.