China's Central Bank Flags More Rate and RRR Cuts

Kevin Morgan

Forex

Remarks of Officials

Economic

Central Bank

Daily News

Summary:

China's central bank signals rate cuts and credit boosts to invigorate its economy, prioritizing yuan stability.

China's central bank has signaled it has room to lower both interest rates and bank reserve requirements, while also moving to cut the cost of its targeted lending tools to provide more direct support to the economy.

People's Bank of China (PBOC) Deputy Governor Zou Lan stated Thursday that the central bank sees "some space" to reduce the reserve requirement ratio (RRR) and key policy rates this year. This comes as the PBOC announced it will lower interest rates on its structural monetary policy tools by 0.25 percentage points, effective Monday. The adjustment brings the one-year rate for several relending facilities down to 1.25% from 1.5%.

These moves underscore a strategy focused on targeted adjustments to aid an economy facing challenges from weak demand and structural imbalances. The signal for broader easing follows a year of limited action, where the PBOC only delivered a single 10-basis-point cut to its policy interest rate in 2025—well short of the 40 to 60 basis points of easing many analysts had anticipated.

Zou also noted that improved interest margins at commercial banks create the necessary conditions for reducing the main policy interest rate, though he did not provide a specific timeline.

Yuan Stability Remains a Key Priority

Addressing recent currency fluctuations, Zou asserted that China has "no need" to devalue the yuan to gain a competitive advantage in global trade. He attributed the yuan's recent gains against the U.S. dollar to a weakening greenback and an easing of geopolitical tensions, rather than a fundamental shift in policy.

The yuan has strengthened over the last 12 months, breaking the key 7-per-dollar level last month for the first time since May 2023. This rally has been supported by several factors:

• Broad-based weakness in the U.S. dollar

• China's expanding trade surplus

• Signs of an improving domestic economy

• Inflows of capital ahead of the Lunar New Year

Zou reiterated that the PBOC is committed to preventing "overshooting" in the currency market and will work to keep the yuan at a "reasonable and balanced equilibrium." He emphasized that the exchange rate has been "basically stable" in recent years and that market forces will continue to play the decisive role.

Tackling Deflation and Bolstering Credit

On the domestic front, Zou highlighted recent positive developments in China's inflation outlook. He said that ensuring a "reasonable recovery in prices" has become a key objective for monetary policy in 2026, as officials aim to steer the world's second-largest economy away from deflationary pressures.

To refine its liquidity management, the central bank also plans to gradually increase its trading of government bonds in its open market operations.

Furthermore, the PBOC is rolling out new measures to boost credit to specific sectors. This includes establishing a dedicated relending program for private companies and increasing quotas for loans aimed at technological innovation. To amplify this support, the PBOC will also provide an additional 500 billion yuan in lending for small businesses and the agricultural sector.

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Nathaniel Wright

Data Interpretation

Remarks of Officials

Economic

Central Bank

China–U.S. Trade War

China's economic growth is projected to slow to 4.5% in 2026 and hold that pace through 2027, according to a Reuters poll of 73 economists. This forecast increases pressure on policymakers to deliver more stimulus as they confront deep structural issues to secure the nation's long-term economic health.

For 2025, gross domestic product (GDP) is expected to have expanded by 4.9%, meeting the government's target of around 5%. This performance was supported by strong exports and existing policy measures, demonstrating remarkable resilience amid global challenges.

However, the economy's reliance on external demand highlights significant underlying vulnerabilities, including weak domestic spending, a prolonged property slump, and persistent deflationary pressures.

Export Boom Masks Domestic Weakness

China's economic strength in 2025 was largely driven by its export sector, which benefited from smaller-than-expected U.S. tariff hikes and a successful push to diversify markets. This allowed policymakers to keep stimulus measures modest.

The country reported a record trade surplus of nearly $1.2 trillion in 2025, fueled by booming exports to non-U.S. markets. This strategy helped producers build global scale to counter sustained pressure from the Trump administration.

Despite this external success, recent data points to a slowdown. Growth in the fourth quarter of 2025 likely cooled to 4.4% year-over-year, down from 4.8% in the third quarter, marking the weakest pace in three years. On a quarterly basis, the economy is forecast to have grown 1.0% in the fourth quarter, a slight dip from 1.1% in the previous quarter.

Rising Trade Tensions Cloud Outlook

The economic outlook for 2026 is clouded by the prospect of rising global trade protectionism and unpredictable U.S. trade policies. President Donald Trump has threatened to impose a 25% tariff on countries that trade with Iran, adding another layer of uncertainty.

"External demand was the biggest positive surprise in 2025," noted Larry Hu, chief China economist at Macquarie. "Should exports disappoint in 2026, it would trigger additional domestic stimulus from Beijing to defend its growth target."

Hu added that the scale of any new stimulus will largely be determined by the severity of an export slowdown.

The Challenge of Rebalancing China's Economy

Economists warn that deep structural imbalances pose a significant risk to China's long-term growth and its ambitions in high-tech industries. The country's economic model remains heavily skewed toward investment over consumption.

Key structural challenges include:

• Low Household Consumption: Chinese household consumption accounts for roughly 40% of the economy, about 20 percentage points below the global average.

• High Investment: Conversely, investment is approximately 20 percentage points higher than the global average.

• Unsustainable Gap: This imbalance is seen as increasingly unsustainable and a drag on broader industrial activity.

Chinese leaders have vowed to "significantly" increase household consumption's share of the economy over the next five years. Many policy advisers believe the target should be to lift this ratio to 45% by 2030. However, efforts to rebalance have been complicated by rising debt levels and external pressures.

Policy Response: More Stimulus Expected

At a key economic meeting in December, Chinese leaders pledged to maintain a "proactive" fiscal policy to support economic growth, which analysts expect will be targeted at around 5% for the year.

The People's Bank of China (PBOC) has signaled its readiness to provide monetary support. The central bank has pledged to cut the reserve requirement ratio (RRR) and interest rates in 2026 to ensure ample liquidity.

Analysts polled by Reuters expect the PBOC to cut its key policy rate—the seven-day reverse repo rate—by 10 basis points in the first quarter. Meanwhile, consumer price inflation is forecast to rise to 0.7% this year and pick up further to 1.0% in 2027, after remaining flat in 2025.

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Gerik

Political

Economic

A Sanctions-Evasion System Moves Into The Open

The capture of Nicolas Maduro by US forces has prompted a rapid unmasking of Venezuela’s so-called dark fleet, an informal network of oil tankers that operated outside conventional tracking systems to bypass US sanctions. These vessels, which routinely concealed their locations and destinations, were essential to sustaining Venezuela’s oil exports during years of international isolation. With the political leadership removed, the operational secrecy that shielded this fleet has started to dissolve.

One of the clearest examples is the supertanker Marbella, which had been untraceable for more than a year. Over the past weekend, the vessel switched on its transponder, revealing it was anchored off Venezuela’s coast carrying 1.9 million barrels of crude. This disclosure coincided with efforts by the US government, together with commodity trading houses Vitol and Trafigura, to move Venezuelan oil into formal trading channels.

Oil Revenues And Regime Survival

Oil represented the core revenue stream for Maduro’s government, financing everything from essential imports such as food and medicine to military procurement. The dark fleet played a central operational role in keeping this revenue flowing. By obscuring shipping data, Venezuela was able to continue exporting crude even under heavy sanctions, at times lifting production to around 1 million barrels per day, a multi-year high.

This relationship was functional rather than coincidental. Without access to transparent shipping and insurance markets, Venezuela’s oil exports depended directly on vessels willing to operate outside standard regulatory oversight. The fleet’s existence therefore reflects a structural adaptation to sanctions rather than opportunistic behavior.

Ghost Ships And Scale Of Operations

The scale of the shadow shipping network is now becoming clearer. Last year, 71 supertankers, each roughly the length of three football fields, were involved in delivering approximately 400,000 barrels of Venezuelan crude per day to Chinese refiners. This implies that nearly six vessels per month moved through Venezuelan waters without openly broadcasting their positions.

These ships often manipulated or disabled GPS signals to evade detection. The supertanker Rene illustrates this practice. At the end of December, its tracking data suggested it was near China. Twelve days later, its signal placed it off the Venezuelan coast. Given that a China–Venezuela voyage can take up to 50 days, the data inconsistency points to deliberate signal spoofing rather than navigational anomalies.

Post-Maduro Shift In Control And Strategy

The emergence of these vessels accelerated in the days following Maduro’s capture on January 3, when the US moved to assert direct influence over Venezuela’s oil sector. President Donald Trump has stated ambitions to rebuild the Venezuelan economy through its oil industry, targeting up to $100 billion in future investment to restore deteriorating infrastructure.

As part of this transition, Trafigura and Vitol are assisting the US government in marketing as much as 50 million barrels of Venezuelan crude. An initial tranche of 4.83 million barrels, already loaded onto ghost vessels, is scheduled to be discharged in Caribbean storage facilities. This marks a shift from covert sanctions evasion to managed reintegration into global energy markets.

Ripple Effects Across Global Shipping

The sudden visibility of Venezuela’s oil flows has begun to affect the wider shipping market. Freight rates on routes from the Caribbean to the US Gulf have surged to their highest levels in almost two years. Rates have also increased on routes to Europe and for tankers transporting oil from Mexico.

This pricing response reflects a causal mechanism. As sanctioned crude re-enters legitimate trade channels, demand for compliant vessels rises, tightening available shipping capacity. The effect is not merely correlated with political change but stems directly from altered trade flows and compliance requirements.

From Shadows To Markets

The Marbella, now transporting crude assigned to Vitol, is en route to the South Riding Point storage facility in the Bahamas, a visible endpoint that contrasts sharply with its year-long disappearance. Similar reappearances across the fleet suggest that Venezuela’s shadow shipping system is rapidly being dismantled or absorbed into formal structures.

What is emerging is not only a clearer picture of how sanctions were circumvented, but also a preview of how global oil logistics adjust when opaque systems are forced into transparency. The long-term consequences will depend on how successfully Venezuela’s oil sector transitions from secrecy to regulation, and whether the market can absorb this shift without further volatility.

Source: Bloomberg

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Gerik

Economic

Stocks

Markets Set For A Positive Start

European stocks were expected to open broadly higher on Thursday, reflecting cautiously improved risk sentiment. Futures pricing indicated the UK’s FTSE 100 opening around 0.6 percent higher, Germany’s DAX up 0.18 percent, France’s CAC 40 gaining 0.2 percent, and Italy’s FTSE MIB rising roughly 0.34 percent. The move suggests investors are selectively adding risk exposure after digesting a heavy flow of geopolitical and macroeconomic developments.

This early optimism appears to be driven more by reduced immediate tail risks than by a decisive shift in growth expectations, pointing to a short-term confidence adjustment rather than a structural re-rating.

Greenland Dispute Remains A Background Risk

Attention remained focused on high-level talks between the United States, Denmark, and Greenland over the future of the Arctic island. The meeting at the White House ended without agreement, with Danish officials describing a fundamental disagreement over sovereignty, even as all parties signaled a willingness to continue discussions.

President Donald Trump reiterated his view that Greenland is critical to US national security and has previously stated that anything short of US control would be unacceptable. While the lack of resolution keeps geopolitical uncertainty elevated, markets appeared to interpret the continuation of dialogue as reducing the likelihood of abrupt escalation in the near term. This reflects a relationship where diplomatic engagement tempers market anxiety, even when underlying disagreements remain unresolved.

Iran Tensions Ease Marginally

Iran also stayed in focus after Trump threatened military action if executions of detained protesters continued following a violent crackdown. Later comments from the president suggested a softer stance, with Trump saying he had been assured executions had stopped and that he would adopt a wait-and-see approach regarding intervention.

Iran’s decision to reopen its airspace early Thursday after a temporary closure reinforced perceptions that immediate tensions may be stabilizing. This shift contributed to a calmer tone across global markets, as the reduced likelihood of near-term conflict lowered demand for defensive positioning.

Earnings And Data Provide Additional Support

On the corporate front, luxury group Richemont reported third-quarter sales growth of 4 percent year on year to 6.4 billion euros, with an 11 percent increase at constant exchange rates. The company posted strong growth across most regions, particularly in the UK and Italy, providing a positive signal for the European luxury sector and supporting broader market sentiment.

Macroeconomic data also played a role. UK GDP grew 0.3 percent in November, significantly outperforming expectations of 0.1 percent growth. Despite the upside surprise, sterling dipped following the release, suggesting that investors remain cautious about the sustainability of growth rather than reacting purely to the headline figure.

Outlook Tempered By Structural Concerns

ING economist James Smith noted that UK growth is likely to slow to around 0.9 percent in the next fiscal year from an expected 1.4 percent this year. He pointed to the fading impact of government spending increases and persistently weak investment confidence, which is expected to weigh on activity in the coming months. This assessment underscores that while recent data have surprised positively, underlying momentum remains fragile.

UK government bond yields edged slightly higher, with the 10-year gilt up by less than one basis point and shorter maturities rising around three basis points, reflecting a modest adjustment rather than a sharp repricing of rate expectations.

Overall, European markets appear set for a higher open driven by a combination of eased geopolitical fears, solid corporate earnings, and better-than-expected economic data. However, the tone remains cautious rather than euphoric, as investors continue to balance short-term relief against longer-term uncertainties surrounding growth, fiscal policy, and geopolitical alignment.

Source: CNBC

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Henry Thompson

Political

Remarks of Officials

Economic

Central Bank

Russia-Ukraine Conflict

Middle East Situation

In an exclusive Oval Office interview on Wednesday, President Donald Trump offered his perspective on several critical global and domestic issues. He questioned the viability of Iranian opposition figure Reza Pahlavi, placed blame on Ukrainian President Volodymyr Zelenskiy for the ongoing war with Russia, and dismissed Republican criticism of a Justice Department probe into Federal Reserve Chairman Jerome Powell.

President Donald Trump discusses key foreign and domestic policy issues from the Resolute Desk in the Oval Office.

Doubts Cast on Iranian Opposition Leader

While Trump has previously signaled support for protesters in Iran, where demonstrations against clerical rule have been met with a deadly crackdown, he expressed reservations about backing Reza Pahlavi, the son of the shah ousted in 1979.

"He seems very nice, but I don't know how he'd play within his own country," Trump stated. "I don't know whether or not his country would accept his leadership, and certainly if they would, that would be fine with me."

These comments expand on Trump's earlier reluctance to meet with Pahlavi. The U.S.-based Pahlavi, 65, is a prominent voice for the protests but faces a fragmented opposition movement composed of rival ideological factions with little organized presence inside Iran.

When asked about the stability of Iran's government, Trump acknowledged the possibility of its collapse but noted that "any regime can fail." He added, "Whether or not it falls or not, it's going to be an interesting period of time."

Trump: Zelenskiy Is the Obstacle to Ukraine Peace

Regarding the four-year war in Ukraine, Trump identified Ukrainian President Volodymyr Zelenskiy as the primary impediment to a peace deal. Despite his campaign promise to end the conflict in a day, the president has struggled to broker a resolution.

Trump claimed that Russian President Vladimir Putin is "ready to make a deal." When asked what was holding up negotiations, Trump's response was direct: "Zelenskiy."

"We have to get President Zelenskiy to go along with it," he added.

Defending Fed Probe and Demanding Party Loyalty

On the domestic front, Trump brushed off concerns from Senate Republicans about a Justice Department investigation into Fed Chairman Jerome Powell. Critics worry the probe interferes with the central bank's independence, but Trump was unmoved by vows from lawmakers to block his Fed nominees in protest.

"I don't care. There's nothing to say. They should be loyal," Trump said of his party's lawmakers.

He also rejected criticism from JPMorgan CEO Jamie Dimon, who warned that meddling with the Fed could lead to a spike in inflation. "I don't care what he says," Trump stated.

President Trump in a meeting at the Oval Office, where he outlined his positions on domestic and international affairs.

Venezuela, Midterms, and the Davos Agenda

The president also discussed his administration's recent actions in Venezuela. He is scheduled to meet with Venezuelan opposition leader Maria Corina Machado on Thursday, their first meeting since Trump directed the arrest of President Nicolas Maduro. "She's a very nice woman," Trump said of Machado, who won the Nobel Peace Prize last year.

He also praised Delcy Rodriguez, Venezuela's acting president, calling their conversation earlier on Wednesday "fascinating" and noting "she's been very good to deal with."

Looking ahead, Trump acknowledged the historical difficulty of midterm elections for the party in power but remained committed to the November races. "When you win the presidency, you don't win the midterms," he said. "But we're going to try very hard to win the midterms."

Throughout the 30-minute interview, Trump emphasized the strength of the U.S. economy, a message he plans to carry to the World Economic Forum in Davos, Switzerland. He intends to stress "how great our economy is, how strong our job numbers are, how good we're doing." While in Davos, he is scheduled to hold bilateral meetings with the leaders of Switzerland, Poland, and Egypt.

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Julia Daniels

Data Interpretation

Economic

Central Bank

Global banking giants are sharply divided on the Federal Reserve's next move on interest rates. While ANZ Bank anticipates a swift return to a rate-cutting cycle, J.P. Morgan argues that the central bank’s easing phase is already over.

ANZ Predicts Aggressive Fed Rate Cuts in 2026

According to Brian Martin, Head of G3 Economic Research at ANZ Bank, the Fed's current pause on rate cuts will be short-lived. Even if rates remain unchanged at the January meeting, Martin expects a pivot back to easing soon after.

ANZ projects that the Federal Open Market Committee (FOMC) could lower the federal funds target range to 3.00%–3.25% by mid-year. This forecast is built on two anticipated 25 basis point cuts, one in March and another in June.

The bank's outlook is based on the view that US inflation will gradually moderate through 2026, driven by three key factors:

• The diminishing impact of tariffs on prices.

• A slowdown in the pace of wage growth.

• A cooling trend in housing inflation.

JPMorgan's Contrarian Call: No Cuts, Hike in 2027

In a starkly different projection, J.P. Morgan’s chief US economist, Michael Feroli, believes the Fed has already completed its rate cuts.

Feroli’s team expects the central bank to maintain a stable policy throughout 2026. In a note to clients, he outlined that the next policy adjustment is more likely to be a rate hike in 2027.

This forecast follows a series of interest rate cuts in the fall and winter of 2025, which brought mortgage rates to their lowest levels in over a year.

To stay updated on all economic events of today, please check out our Economic calendar

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Gerik

Economic

Stronger-Than-Forecast Monthly Growth

Britain’s gross domestic product grew by 0.3 percent month on month in November, reversing a 0.1 percent contraction recorded in October and exceeding market expectations of a modest 0.1 percent increase. The data indicate a short-term improvement in economic momentum following a period of softness in early autumn, when uncertainty around fiscal policy weighed on activity.

This upside surprise reflects a concentration of growth drivers rather than a broad-based acceleration across all sectors, suggesting that November’s strength was partly shaped by sector-specific normalization effects.

Industrial Output Driven by Auto Sector Rebound

Nearly half of November’s GDP growth was attributable to industrial production, which rose 1.1 percent on the month. Within this category, car manufacturing played a dominant role. Vehicle output surged 25 percent after Jaguar Land Rover resumed normal operations following a cyberattack that had disrupted production at its plants and across parts of its supply chain.

This marked the largest monthly increase in UK car production since July 2020. The relationship here is largely causal, as the restoration of manufacturing capacity directly lifted output levels after a temporary shock rather than reflecting a new trend in demand.

Services Sector Adds Unexpected Support

The UK’s services sector, which accounts for the majority of economic output, also contributed positively. Services output increased by 0.3 percent in November, recovering from a 0.3 percent decline in October and outperforming expectations. This improvement points to a partial stabilization in consumer-facing and business services after earlier signs of hesitation.

However, the rebound appears corrective rather than expansionary in nature, as it followed a month of contraction and came amid lingering concerns about household spending and business confidence.

Fiscal Uncertainty Had Weighed On Activity

Earlier surveys had indicated that economic activity was faltering in the run-up to Chancellor Rachel Reeves’ annual budget statement on November 26. Speculation around potential tax increases appeared to dampen sentiment among firms and consumers alike. The November data suggest that these headwinds did not fully suppress output, though they may still be influencing underlying growth dynamics.

In this context, the November improvement can be interpreted as a temporary offset to policy-related uncertainty rather than definitive evidence of renewed economic strength.

Cautious Outlook Despite Positive Data

Despite the stronger-than-expected November figures, the Bank of England maintains a cautious view of the near-term outlook. The central bank expects the economy to show zero growth over the October-to-December 2025 period as a whole, even though it estimates underlying growth at around 0.2 percent per quarter.

This divergence highlights a distinction between short-term volatility and longer-term trend growth. November’s expansion was boosted by one-off factors, particularly in manufacturing, while the broader economy continues to face structural and cyclical constraints that limit sustained acceleration.