Recently, the Monetary Policy Committee of the People's Bank of China held its regular meeting for the first quarter of 2025. Overall, monetary policy still maintains a supportive stance.

The meeting analyzed the domestic and international economic and financial situation and made arrangements for subsequent monetary policies. It is necessary to implement a moderately loose monetary policy, strengthen counter-cyclical regulation, better play the dual functions of monetary policy tools in terms of both volume and structure, increase coordination and cooperation between monetary and fiscal policies, and maintain stable economic growth and reasonable prices.

Compared with the previous quarter, this meeting put more emphasis on the rising uncertainty from the external environment. The meeting analyzed the domestic and international economic and financial situation and pointed out that the current external environment is becoming more complex and severe, the world economic growth momentum is not strong, the economic performance of major economies is differentiated, and the uncertainty of inflation trend and monetary policy adjustment is increasing.

According to comprehensive market analysis, the domestic economic situation has remained basically unchanged, and concerns about overseas inflation and policy uncertainty have increased. Monetary policy has generally maintained a supportive stance. It is expected that before a comprehensive interest rate cut, a reserve requirement ratio cut and a structural interest rate cut may be implemented first.

Choose the right time to lower the reserve requirement ratio and interest rates

Regarding monetary policy, the statement that the market is very concerned about is: based on the domestic and international economic and financial situation and the operation of the financial market, choose the right time to lower the reserve requirement ratio and interest rates.

In terms of policy orientation, the regular meeting proposed that "we should implement a moderately loose monetary policy, strengthen countercyclical regulation, better play the dual functions of monetary policy tools in terms of both quantity and structure, increase the coordination and cooperation between monetary and fiscal policies, and maintain stable economic growth and prices at reasonable levels." This is basically the same as the content of the regular meeting in the fourth quarter of 2024.

Some experts analyzed that the average deposit reserve ratio of my country's financial institutions is currently 6.6%, and there is still room for decline. We must flexibly seize opportunities to maximize the effectiveness of policies. "At present, there are still many internal and external challenges and uncertainties in the continued recovery of the economy. It is necessary to maintain a reasonable space for monetary policy. Policy resources must be used where they are needed to cope with various uncertainties in the future."

Wang Qing, chief macro analyst at Orient Securities, believes that this means that the general trend this year is to lower the reserve requirement ratio and interest rates, and the key is the timing of implementation. "Selecting the right time" means that the central bank will start lowering the reserve requirement ratio and interest rates at key times such as implementing counter-cyclical adjustments, guiding social expectations, and regulating market liquidity. This can maximize the effectiveness of policy tools and also help reserve policy space.

Taking into account the current real estate market, changes in the external economic and trade environment, and overall price trends, Wang Qing judged that the window for lowering the reserve requirement ratio and interest rates is expected to open in the second quarter.

Galaxy Securities Research Report analyzed that the monetary policy orientation is moderately loose, and there is still room for interest rate and reserve requirement ratio cuts within the year, but another interest rate cut needs to wait. Before a comprehensive interest rate cut, reserve requirement ratio cuts and structural interest rate cuts may be implemented first. Observing the signals of monetary policy re-entering easing may include the joint working group meeting of the central bank and the Ministry of Finance, and the central bank restarting the purchase of treasury bonds. Before a comprehensive interest rate cut, a structural interest rate cut may be carried out to reduce the interest rate of funds for structural monetary policy tools. Both reserve requirement ratio cuts and buy-out reverse repurchases will be important tools for releasing medium- and long-term liquidity. At the same time, reserve requirement ratio cuts can save bank costs and support credit expansion. Reserve requirement ratio cuts may be implemented before comprehensive interest rate cuts.

Galaxy Securities analyzed that there is still room for interest rate and reserve requirement ratio cuts in 2025. The policy interest rate (7-day reverse repurchase rate) may be reduced by 30-40BP in total throughout the year, guiding the 5-year LPR down by 40-60BP. The reserve requirement ratio may be reduced by 100-150BP in total throughout the year. The central bank's net purchase of treasury bonds in the open market may be above 2 trillion yuan throughout the year.

In terms of structural monetary policy, the meeting proposed to "effectively implement various existing structural monetary policy tools...study and create new structural monetary policy tools, focus on supporting investment and financing in the field of scientific and technological innovation, promote consumption and stabilize foreign trade."

Wang Qing judged that it is possible to establish targeted policy tools to promote consumption this year, and to increase support for the "increase in volume and decrease in price" of consumer loans; at the same time, the interest rates of various structural monetary policy tools, including re-lending to support agriculture and small businesses, re-lending for scientific and technological innovation and technological transformation, and re-lending for affordable housing, will be lowered in a timely manner, and the quotas will be further increased, so as to continuously increase support for key areas and weak links in the national economy, do a good job in the "five major articles", and thereby guide the overall downward trend in the financing costs of enterprises and residents.

Pay close attention to interest rate market trends

Another focus of the market in this regular meeting is: observe and evaluate the operation of the bond market from a macro-prudential perspective, and pay attention to changes in long-term yields.

As of 18:00 on March 20, the 10-year Treasury bond yield hit 1.91%, having once recovered the 2% mark during the previous trading day. This means that the 10-year Treasury bond yield has rebounded by about 31 basis points from the low point on January 6.

A research report by Galaxy Securities pointed out that in terms of long-term bonds, the regular meeting added a new item "observing and evaluating the operation of the bond market from a macro-prudential perspective", which means avoiding a too rapid decline in long-term bond yields. This not only takes into account the reduction of exchange rate pressure through the interest rate gap between China and the United States, but also avoids excessive consumption of monetary policy operating space and excessive congestion in bond market transactions that may lead to financial risks.

Mingming, chief economist of CITIC Securities, believes that this statement means that the central bank may pay closer attention to interest rate market trends and flexibly adjust monetary tools in the future.

A research report by Western Securities pointed out that for the bond market, under the influence of the central bank's interest rate transmission, the bond market interest rate may re-anchor the policy interest rate pricing; it is expected that the central bank will focus on the risks that may be brought about by rapid and large fluctuations in interest rates. The current revision of interest rate cut expectations has been relatively sufficient, and the bond market has entered a period of volatility.