MNI INTERVIEW2: PBOC Needs To Improve Communication-Economist

The People’s Bank of China needs to improve its communications to prevent market misunderstandings as it transitions its policy framework to one in which rate benchmarks play an increasingly central role, while also retaining liquidity management tools and bond transactions, a prominent economist told MNI.

For the moment, reverse repo operations and government bond transactions provide the PBOC with additional operational flexibility to manage liquidity in the event of economic weakness, financial stress or external shocks, Yu Changhua, professor at Peking University’s National School of Development, said in an interview, noting that the PBOC has continued to rely on these instruments, together with quantity-based and structural tools such as targeted relending facilities, even as it shifts towards a price-based framework.

“Rather than an incomplete reform, this reflects a pragmatic choice tailored to the current realities of China’s financial system,” Yu said.

However, the use of multiple tools risks blurring market perceptions of the PBOC’s intentions, he said, pointing out that, for example, an increase in reverse repo operations or bond purchases for liquidity purposes could be misinterpreted as a broader signal of monetary easing or a shift in the policy stance. In order to counter this, the central bank needs to articulate the objectives, tenor structures, and policy intentions behind its liquidity injections, so preventing balance-sheet operations from being misconstrued as a directional policy shift, the economist suggested. (See MNI INTERVIEW2: China Needs Monetary Easing To Boost Growth)

STRUCTURAL TOOLS

The PBOC’s structural instruments remain a key supplement to broad monetary policy in an economy with imperfect transmission of interest rates and distorted credit allocation, Yu said, adding that rate cuts alone may not be sufficient to ease financing terms for tech firms, small enterprises, and businesses undergoing the green transition. The central bank can also reshape funding conditions and risk premiums for financial institutions by expanding the eligible collateral pool, he said.

But structural and targeted tools can be overused, which would not only dilute the signalling power of benchmark rates but could potentially lead to capital misallocation, fuel financial bubbles or exacerbate industrial overcapacity, Yu cautioned, adding that the tools should be time-limited and be transparently evaluated. The economist also called for clearer boundaries between monetary policy, fiscal policy, industrial policy and macroprudential regulation.

As China’s sovereign debt market deepens and liquidity improves, the PBOC’s purchases and sales of government bonds can become a more flexible channel for injecting or withdrawing base money, reinforcing the operational framework for price-based monetary policy, Yu said. However, he noted that if the central bank were to conduct persistent, large-scale purchases of medium- and long-term Chinese government bonds to suppress long-term yields and term premiums in a bid to stimulate growth, such operations would increasingly resemble quantitative easing. (See MNI INTERVIEW: Window Of Opportunity For China Stimulus)

“This distinction is not absolute,” he said.

At present, the PBOC’s government bond transactions mainly serve as a supplementary instrument for base-money provision and liquidity management, while daily overnight reverse repo operations play the central role in anchoring short-term money-market rates near the policy rate, Yu said. 

 MNI INTERVIEW: New PBOC Framework Works Best On Short Rates

The People's Bank of China’s latest interest rate framework will enhance its control over short-term money-market rates, but its ability to influence the cost of longer-term lending remains constrained by weaknesses in the banking system and by a persistent tendency to favour state-backed borrowers, a prominent economist told MNI. 

The PBOC’s move earlier this month to replace the seven-day reverse repo rate with the overnight reverse repo as its primary policy rate will mean that shorter-term rates will take their direction from the new benchmark, though their transmission to longer-term lending costs will remain indirect, operating through the Loan Prime Rate, banks’ funding costs and credit-risk spreads, said Yu Changhua, professor at Peking University’s National School of Development.

The re-anchoring is a crucial step in China’s transition towards a price-based monetary system, said Yu, who was invited to discuss monetary policy transmission with researchers and officials at the PBOC in September. (See MNI PBOC WATCH: LPR Held, As PBOC Switches Benchmarks)

However, while altering the policy-rate anchor can enhance short-end rate stability and clarify policy signals, improving loan pricing and monetary-policy transmission will also require strengthening commercial banks’ capacity for market-based credit-risk pricing.

“The stimulative impact of the re-anchoring should not be overstated, and it cannot substitute for reserve requirement ratio cuts or interest rate reductions,” he noted. 

China’s main economic challenges, including weak domestic demand, subdued corporate profit expectations, and cautious household spending, will require not just monetary policy to support private sector investment and consumption but also fiscal moves to stimulate aggregate demand, he said. (See MNI INTERVIEW: China Advisor Calls For More Public Investment）

OVERNIGHT RATE

Pivoting to an overnight rate allows the PBOC to manage short-term liquidity costs more directly and precisely, and formally establishing it as the main policy-rate benchmark will clarify policy signalling, enhancing the transparency and predictability of monetary policy, the professor said. 

But there is no frictionless transmission mechanism linking overnight funding rates to interbank certificates of deposit, bond yields and bank lending rates, he added. This problem is particularly acute within the banking system, whose uneven distribution of capital and liquidity means that even when overall liquidity is abundant, it can remain concentrated in certain institutions or circulate within the financial system without translating into additional credit to the real economy, while capital constraints may limit some banks’ capacity and willingness to lend, Yu said.

A more significant problem is the banking system's persistent tendency to favour state-owned enterprises and borrowers benefiting from implicit government guarantees, which means that even if market interest rates decline, private firms' financing conditions may not see any corresponding relief, he said.

The priority for monetary policymakers should not merely be to diversify rate pricing benchmarks, but to find ways to improve market-rate transmission and reduce non-market influences on credit allocation, Yu said.

MNI INTERVIEW: Right-Wing Spanish Gov't To Cut Spending, Debt

A new conservative Spanish government would seek to restore budget balance through cuts to public spending and sales of state holdings in non-strategic companies, and also take measures to boost investment in energy and data centres, the People’s Party economic chief told MNI.

A return to budget balance would allow Spain to reduce its debt without relying heavily on flexibility available under EU fiscal rules and also attract more capital and investment, Juan Bravo, economic spokesman for the PP, which polls suggest is set to emerge leading a coalition government after elections on Nov 29, said in an interview

 “The country that is more credible is the one that attracts all the investment,” he said, adding that Spain has margin to continue to reduce its spread with German bunds, at a time when German government spending is rising. “Our objective is to return to budget balance.” (See MN POLICY: EU To Get Tough On Fiscal Rules After Bond Rout)

Bravo wants to save EUR1.5 billion per year by reducing the number of ministries from 22 to 14, and another EUR1.3 billion by improving the management of state-owned companies and political hires. More savings would come from trimming overlapping responsibilities between central, regional and local administrations, as well as from trimming subsidies.

New technologies and AI should also allow reductions in civil service staffing, with around 40% of public employees expected to retire over the next eight years, Bravo said.

He declined to provide targets for the deficit or debt, pointing to what he said was past experience of deception by the governing Socialists with regards to the state of the public finances.

CAIXABANK

A PP-led government would seek to sell state holdings in companies “where public ownership is not strategically necessary,” with an 18% stake in CaixaBank and 10% of Telefonica prime examples. 

“What we do want to convey is that we will not be in places where state participation does not make sense,” Bravo said, though he added that the stake sales would be timed to maximise returns and in consultation with the companies’ management teams.

DATA CENTRES

Legislation will also allow Spain’s autonomous regions to speed up construction of data centres, Bravo said, noting the country’s access to international data cables and potential for cheap energy. The government would also promote EUR300 billion of investment needed in infrastructure including energy over 15 years, almost twice the current annual rate, from both public and private capital, he said, claiming that more than EUR1 billion in renewable electricity generation is currently wasted per year because of insufficient demand and storage capacity.

A new right-leaning government would raise personal income tax brackets to reflect inflation and update family tax allowances frozen for 11 years, Bravo said. The PP wants a broader tax reform, including changes to personal income tax and the tax administration, as well as measures to encourage investment through corporation tax, he added.

DEFENCE

In contrast to the reluctance of current Socialist Prime Minister Pedro Sanchez to boost defence spending, the PP would push for an increase to 3.5% of GDP in the medium-term, in line with other European countries, Bravo said. Increased spending would boost pay for military personnel and include investment in dual military-civilian infrastructure such as ports. At least 60% of the money spent should remain in Spain, with procurement supporting national industry, he said.

Spain should also take a role in reviving the project to build a new generation fighter aircraft under Europe’s Future Combat Air System, working with Germany and seeking alternative partners including possibly Sweden, Denmark, the UK or Turkey if France does not cooperate, said Bravo.

Spain has currently taken EUR1 billion from the EU’s SAFE defence-funding facility, and Bravo said that any increase in that amount would depend on financing costs.

Under the PP, Spain will also align its position on China with that of the broader EU, in a significant departure from Sanchez’s policy of seeking warmer ties with Beijing.

“If we are partners of the EU, we take the decision together and are not going on our own,” Bravo said.

Bravo played down the prospect of major economic disagreements with Vox, the right-wing party whose support the PP is likely to need in order to form a government. Drawing on his experience negotiating budgets as Andalusia's regional economy minister, he said the two parties were “on a similar page” on economic policy and that the main difficulties in reaching agreements would lie in other areas. (See MNI SOURCES: Bond Selloff, France, Clouds ECB Dec Rate Call)

MNI INTERVIEW: BOJ To Harden Policy Stance - Sakurai

The Bank of Japan is likely to harden its language around its pre-emptive approach to monetary policy to more align with global central banking norms to stabilise underlying CPI inflation at about 2%, as it grapples with inflationary government spending and a persistently weaker yen, former BOJ board member Makoto Sakurai told MNI. 

While Prime Minister Sanae Takaichi's government has likely accepted the 1.25% policy rate will need to rise further, it has not limited its often contradictory fiscal policies, he said, pointing to the recent passing of a consumption tax cut bill. The government's fiscal expansion will continue to weaken the yen, with further BOJ rate hikes only slowing its decline, Sakurai argued. The BOJ is likely to reiterate its position in future that it will act pre-emptively, or in an emergency, based on the outlook for the economy and price developments, Sakurai said, noting that several peer central banks had recently used similar language.

He maintained his view that the BOJ would raise its policy rate to 1.5% in December and continue hiking at roughly three-month intervals until it reaches his estimated terminal rate of 2%. (See MNI INTERVIEW: Ex-BOJ Sakurai Sees Dec Hike, 2% Terminal Rate) The Board is likely to take a wait-and-see attitude in or after mid-2027 after raising the rate to 2%, depending on price moves. “Should the inflation rate accelerate, raising the policy rate above 2% would be necessary, but such a rate hike may be resisted by the government or public,” he continued, adding the government would likely accept a 2% rate. 

Markets see the policy rate peaking at 1.8% by September 2027, with a 75% chance of a hike priced in for the December meeting.   

FUTURE INFLATION

FINANCIAL CONDITIONS

Sakurai said financial conditions varied between large and smaller firms, making it difficult for the BOJ to assess the overall degree of monetary accommodation. 

While financial conditions remained accommodative at the macro level, the BOJ must gather information at the micro level and assess whether tighter conditions were weighing on economic growth, he added.

Pointing to falling property prices, he warned some real-estate firms were struggling with high borrowing costs on "revolving" rates rather than fixed-rate loans, prompting some to sell properties to repay debt. Real-estate firms accounted for around 30-40% of total lending by small financial institutions, exposing those lenders to potential unrealised losses and rising credit risks that could undermine financial system stability, he warned.

The BOJ was paying closer attention to the effects of higher borrowing costs on businesses and the financial system. If the Bank was slow to respond, it would increase the risk of a bubble bursting, Sakurai concluded.

MNI: RBA's 4.85% Cash Rate Likely At Peak - Economists

The Reserve Bank of Australia has likely reached the peak of its tightening cycle, although how long the cash rate remains at 4.85% will depend on the impact of higher borrowing costs on the real economy and whether further supply shocks emerge, prominent economists told MNI.

The current level of the rate is highly restrictive and will increasingly weigh on the economy over the next 12 months, particularly as unemployment rises, said former RBA economist Martin Eftimoski.

Eftimoski, who worked at the RBA from 2017 to 2021, believed the Bank should have held at 4.6% last week. The RBA's communication has become too focused on academic and market commentary rather than explaining the pressures facing Australian households and businesses, he added, noting the Bank had based its decision too much on models and not enough on the real economy. (See MNI RBA WATCH: Bullock Points To Dual Mandate Following Hike)

“There's a lot of people in their ears about monetary policy, and they've pivoted so hard away from the anecdotal world,” Eftimoski added. “In the process they've actually gone too hard into that world of abstract theoretical construction, and I think they're missing the high-dimensional complexity of their task. These models that they build, they're just approximations." 

He questioned how the RBA would respond if the federal government adopted a more expansionary fiscal stance ahead of the 2028 election, arguing that political pressure for stimulus could complicate the Bank's efforts to contain inflation, while its ability to hike further to counter higher government spending will be limited due to the already restrictive level of the cash rate. 

Eftimoski also cautioned against assuming a particular path for interest rates, given the uncertainty surrounding global bond yields, oil prices and developments in the Persian Gulf, pointing to Governor Michele Bullock's comments last week that the direction of the cash rate was unknown and would rely on data. While he sees little chance of a further hike, inflation has now been above the Bank's target for about six years and an additional supply shock that pushes price rises higher could leave the bank with little choice but to act to maintain its creditability and contain inflation expectations, he added. 

PEAK RATE

James Morley, professor of macroeconomics at the University of Sydney, agreed with the RBA's decision to raise rates but doubted further tightening would be necessary under current circumstances.

Morley said the Bank was right to prioritise the risk of entrenched inflation expectations, given that inflation was running higher in Australia than in some other countries and reflected, in part, domestic pressures. However, rising unemployment, falling house prices and the delayed effects of previous rate increases could provide sufficient restraint on demand to bring inflation lower without further tightening.

Morley said it would take a significant upside inflation surprise in the new year to convince him that the RBA needed to raise rates again. He also noted that the RBA had acknowledged the possibility that its tightening cycle could lead to a recession, although this was not necessarily its central expectation.

"There's a sense that these policy moves will have an impact on the real economy. The question is how much. The long and variable lags of monetary policy are always a bit uncertain and it interacts with other developments like those in the global economy. We've already seen big drops in house prices and that traditionally will have an affect via the wealth channel on spending." 

Unemployment is likely to rise further, he said, pointing to the RBA's 5.1% unemployment projection by Dec 2028, although whether growth slows fast enough to push unemployment sharply higher would depend on other developments, including global conditions and consumer spending strength. 

Morley pushed back against the notion that the RBA had become too dependent on its models, noting it appeared to be placing greater emphasis on actual inflation outcomes rather than relying as heavily on forecasts, reflecting the recent deterioration in both headline and underlying price measures. The shift also reflected the Bank's desire to demonstrate its commitment to bringing inflation back within its 2-3% target range and keeping longer-term expectations anchored, he concluded.

MN POLICY: EU To Get Tough On Fiscal Rules After Bond Rout

European Economy Commissioner Valdis Dombrovskis signalled to euro area finance ministers on Monday that he is ready to get tough on enforcing the EU's fiscal rules as bond markets turn volatile, MNI understands.

The commissioner told the ministers that he will be sending out letters to some countries as they prepare their 2027 draft budget plans warning they are at risk of non-compliance with the spending paths to which they are committed in their medium-term fiscal structural plans. He did not name the states in question. 

The comments reflect growing concern among EU officials over recent bond market volatility as well as the persistently high level of level of public debt in some countries. 

Dombrovskis also noted during the meeting that some countries might face steps under the Excessive Deficit Procedure for failure to comply with their 2026 budget commitments.

The Commission is due to issue its Autumn Package, a key annual milestone in its surveillance of states' fiscal policies, on Nov 24 following next week's autumn economic forecasts. The commissioner hinted today that there will be a slight upward revision to 2026 euro area growth in the estimates.

Earlier on Monday EU finance ministers approved the National Escape Clause for Italy allowing it flexibility under the fiscal rules for defence spending and energy measures up to 0.6% of GDP. Rome believes that granting the NEC is a nod to the country’s compromise of closing its 2026 deficit below 3% of GDP, allowing an exit of the Excessive Deficit Procedure while activating the NEC. (See MNI: Meloni Tax Cuts Depend On EU Flexibility -Sources )

MNI INTERVIEW: BOC Hiking In December, Again By March-Lapointe

Canada's central bank will raise interest rates for a second meeting next month and again by March, with official comments about moving cautiously aimed at preventing market over reactions rather than being motivated by any risk that inflation quickly settles down, a former finance department official told MNI.

“They aren’t put in a box, but they’ve set themselves pretty clearly on a path to do it in December, otherwise there’s something that’s not consistent in his thinking,” said Dominique Lapointe, now director of macro strategy at Manulife in Montreal. “They mentioned being cautious because they didn’t want markets to integrate so many rate hikes.”

Investors earlier this year priced in three rate hikes for 2026 and speculation has been volatile since Governor Tiff Macklem hiked the policy rate for the first time in more than three years. Macklem also boosted the 2027 inflation forecast to 3.1% from 2% and said the Iran war means more Canadian firms will start passing on cost increases. 

That's a medium-term view and will remain in place even if the next inflation report Nov 16 is weak, Lapointe said. “They are thinking inflation is going to stay higher for longer-- 3% next year, that’s a strong forecast. And I think crucially they don’t see an end to the conflict.”

The main question as to whether another hike will come in January or March is whether Mark Carney and Donald Trump resolve the tariffs dispute, Lapointe said. “They are going to raise rates in December and then they are going to do it in January if we have a deal with the U.S. If we don’t then they are going to do it in March.”

OIL WINDFALL

The Governor told MNI earlier this year his focus is inflation even if there's a trade-off against growth. He told lawmakers last week growth was still set to coming in around 2% annualized in the third quarter after flash GDP figures showed it closer to 1%. (See: MNI INTERVIEW: Macklem-BOC Faces Tough Calls Ahead On Rates)

The Bank sees growth rebounding to 2% next year and points to domestic energy producers benefitting from higher prices, exporters’ resilience in the face of tariffs and more government spending to spur investment. “Their thinking is that higher oil is good for Canada,” Lapointe said. 

Carney is also seeing an energy windfall, and his budget Thursday focused on corporate tax cuts that will squeeze federal finances if there's another global shock before big projects pay off, he said.

“There isn’t a lot of room to maneuver in a very uncertain global economic picture,” Lapointe says. Downside risks include tariffs, problems in the AI industry, and tighter global financial conditions including bond yields, he said.

WEAK FISCAL ANCHORS

“The deficit could easily go back to a hundred billion in a dire economic situation. That is not our base case, but it could happen, and we’re in a global bond market,” he said. (See MNI INTERVIEW: Canada Heading Back To 1990s Debt Wall- Ragan)

Thursday's budget showed the deficit for the fiscal year ending in March at CAD62.3 billion or 1.8% of GDP. It also indicated no progress in lowering debt as a percentage of GDP until the middle of the next decade.

“It used to be the goal, the anchor, was that it’s declining, let alone balancing the budget. Now it’s not,” Lapointe said.

That weakens arguments from ministers about strength relative to G7 peers on measures like net debt, Lapointe said, while more foreign buying of Canadian bonds in recent years amplifies risk.