BofA: China Rate Outlook — Rate Path Through an Easing Cycle
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Bank of America assesses China's interest rate trajectory within an ongoing policy easing cycle, forecasting a 10-basis-point cut to both the 1-year LPR and MLF rates in the second half of 2026. The report notes that a previous 15-basis-point reduction in deposit rates has provided a buffer for bank net interest margins, creating room for further policy rate adjustments. The economic recovery remains weaker than expected, characterized by slowing GDP growth, subdued CPI, and declining real estate investment, which together justify additional monetary support.
The central bank is expected to favor targeted structural tools, such as relending facilities, over broad-based reserve requirement ratio cuts to manage liquidity. Interbank liquidity remains ample, with DR007 holding near 1.8%. The 10-year government bond yield is projected to trade within a 2.5% to 2.7% range, supported by easing expectations and muted inflation, as PPI remains in negative territory.
Persistent weakness in property loan demand continues to cap the upside potential for interest rates. Key risks to this outlook include a stronger-than-anticipated economic rebound or a pickup in inflation, either of which could delay the expected easing measures.
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