The PBoC is slowly and hesitantly cutting lending rates – much more slowly than in the rest of the world, so in relative terms they are rising – and is having trouble cutting the deposit rate. Although this reluctance has apparently...

https://www.bloomberg.com/news/articles/2020-04-03/pboc-says-complete-evaluation-needed-before-deposit-rate-move via @business

...surprised many, it shouldn’t have.

The PBoC is under multiple conflicting constraints. It wants to lower lending rates to ease costs for heavily indebted borrowers and to protect businesses hit hard by the Covid-19-related collapse in demand, but at the same time it...

...cannot lower an already-highly-negative real deposit rate because of its negative impact on household income and consumption, and if it reduces lending spreads for banks by lowering the former without lowering the latter, it hurts the profitability of a banking system that...

...urgently needs to be recapitalized. Finally it must keep overall interest rates high enough to attract foreign inflows that allow it to expand domestic money supply without increasing distortions in the financial system.

Whatever it chooses to do, it’s probably safe to...

...assume that the PBoC will move in very small steps. It doesn’t have many obvious options.