(March 21): China’s central bank signalled a potential boost of liquidity for banks, but expressed caution on cutting interest rates after the world’s second-largest economy reported an upbeat start to 2024.

There is still room to lower the reserve requirement ratio (RRR) for banks, which is an important tool to adjust liquidity, People’s Bank of China (PBOC) deputy governor Xuan Changneng said during a Thursday briefing. He added that interest rate policy in the country can become more “autonomous”, as deposit rates trend lower and other major global economies move towards easing, alluding to current limitations from banks’ thin profit margins and the Federal Reserve’s elevated rates.

“China’s monetary policy space is ample, and the policy toolbox is abundant,” Xuan said. “Financial support for the economy is still solid.”

The remarks show the PBOC sees no rush to cut rates for now, as it is likely to cut the RRR this year and monetary policy remains loose, according to economists. Official data pointed to better-than-expected growth in the export, industrial and investment sectors in the first two months of the year, giving policymakers a chance to pause easing and assess growth momentum.

“A rate cut may be delayed,” said Zhang Zhiwei, the chief economist of Pinpoint Asset Management Ltd. He cited concerns including more pressure on the already weak yuan and China’s flattening yield curve, which suggests traders are growing pessimistic about the country’s longer-term growth outlook.

Raymond Yeung, the chief economist for Greater China at Australia and New Zealand Banking Group Ltd, expects banks to lower their deposit rates in April. That would help ease the pressure from their narrowing profit margins and open up space for lending rates to fall. He also forecast a cut in the RRR in the second half of the year.

Xuan’s remarks come a few weeks after PBOC governor Pan Gongsheng stressed that there is still room for the central bank to cut the RRR, allowing lenders to keep smaller reserves and therefore encouraging lending. Neither gave any indication of when another trim may come. In January, Pan announced a 50-basis-point reduction in the RRR during a live press briefing. That cut was larger than most analysts expected.

Earlier on Thursday, Chinese state media reported that policymakers were in an “observation period”, after the economy showed signs of strength in the first two months of the year. Investors have been scrutinising statements by Chinese policymakers, as they look for any clues about potential stimulus this year. Beijing is targeting growth of around 5%, an ambitious rate that some analysts say may require more support.

Xuan signalled that the PBOC is satisfied with the growth of credit and money supply for now, and will maintain ample liquidity, even as loans expanded at the slowest rate on record in February. He explained that credit growth of at least 8% is in line with the nominal economic growth target of about 8%.