Offshore Yuan Declines as PBOC Lowers Fixing Amid Rate-Cut Bets

The offshore yuan fell for a second day as China’s central bank cut its daily reference rate to a one-week low amid speculation policy makers will reduce borrowing costs to boost the economy.

Premier Li Keqiang’s economic expansion goals of 6.5-7 percent for this year and at least 6.5 percent every year through 2020 are too ambitious, according to Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong. He estimated that the central bank will reduce benchmark deposit and lending rates by 50 basis points this year. ING Groep NV expects a 25 basis point reduction before the end of March, with continued factory gate deflation constricting cash flows for companies.

The nation’s producer-price index extended a record run of declines to 48 months in February, while consumer inflation accelerated the most since mid-2014, according to official data released Thursday. The central bank has taken several steps to lower borrowing costs, cutting benchmark interest rates six times since 2014 and reducing bank reserve-requirement ratios.

"The gain in consumer prices, which was caused by seasonal factors such as the Lunar New Year, won’t be sustainable, and the weak PPI will encourage the PBOC to reduce interest rates," said Qi Gao, a Hong Kong-based strategist at Scotiabank. "Sentiment toward the yuan has improved in the past few weeks, offering a window for monetary easing. We expect the central bank to cut interest rates once and reserve-requirement ratios three to four times this year."

The yuan traded in Hong Kong fell 0.13 percent to 6.5203 a dollar as of 11:19 a.m. local time, according to prices compiled by Bloomberg. That trims its gain for the past month to 0.4 percent. The onshore rate retreated 0.04 percent to 6.5157, China Foreign Exchange Trade System prices show. The central bank weakened its reference rate by 0.03 percent to 6.5127.

To contact Bloomberg News staff for this story: Tian Chen in Beijing at tchen259@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Robin Ganguly, Phani Varahabhotla

By: Bloomberg News

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