Monday Morning Update

This morning has seen the PBoC cut its 1-year loan prime rate by 0.1 percentage point, bringing it a record low of 3.45%. This comes less than a week after the PBoC reduced short-term and medium-term policy rates as the central bank grapples with a flagging economy, deflation and a weakening renminbi. The five-year rate was also kept unchanged, missing expectations of a 15bps cut (which was similarly forecasted for the 1-year LPR).

This morning’s further monetary loosing comes as markets look for further clarification on any fiscal measures that Beijing may be willing to implement. Calls for such measures to be announced have grown recently given financial markets’ focus on the fragility of the Chinese property sector which reached a fresh climax last week given developments around Country Garden and Evergrande. Last Thursday for example, Evergrande filed for chapter 15 bankruptcy protection in New York while the risk of default continued to loom over Country Garden.

The latest monetary loosening follows China’s slip into deflationary territory as headline CPI (annualised) fell 0.3% in July. This marked the first deflationary print since February 2021, and comes as the economy contends with weakening demand both on a domestic and international basis. Exports leaving the world’s second largest economy for instance have slumped 14.5% on an annualised basis, raising concerns over whether Beijing will reach their (around) 5% growth target this year.

Tomorrow morning will see the release of the UK’s public Sector Net Borrowing figure for the month of July. Earlier this summer we learnt that the UK’s debt-to-GDP has exceeded 100% for the first time since 1961 while last week we saw yields on 10-year UK government bonds hit fresh 15-year highs.  With government borrowing in May 2023 over double that of May 2022 the growing government deficit has continued to feed into the UK’s national debt which now stands at around £2.6tn.

As we’ve commented on previously, the OBR has descried how the rise in global inflation has brought little net benefit to the UK insofar as the country’s public finances are concerned. In theory, higher inflation should increase nominal tax revenues (particularly if people are shifted into higher tax brackets), while also reducing the real value of debt. However, the OBR notes that the “UK, in particular, experienced the ‘wrong sort of inflation’ in 2022 with RPI and CPI (which drive increases in index-linked debt, pensions and working-age welfare payments) rising far more than both average earnings (a key driver of tax revenues) and the GDP deflator (the measure of inflation used to calculate nominal GDP).”