As the third quarter unfolds, the timing, intensity, and priority of implementing aggregate monetary policy tools such as reserve requirement ratio (RRR) cuts and interest rate cuts have become a focal point of debate. Following a series of key meetings that signaled "timely adjustments" and "incremental policies," the central bank's latest report has set a tone for strengthening counter-cyclical adjustments, further broadening the scope for monetary policy maneuvers.
On August 12, the People's Bank of China (PBOC) released its Second Quarter 2026 Monetary Policy Implementation Report, which echoed the Politburo meeting's overall stance by emphasizing the "comprehensive use and timely adjustment of monetary policy tools." Although the report did not explicitly mention RRR or interest rate cuts, it called for "fully leveraging the effectiveness of existing policies, promptly planning and introducing practical and effective incremental policies, intensifying counter-cyclical adjustments, and accelerating efforts to expand domestic demand and optimize supply." This has fueled market expectations for potential easing measures.
Compared to the first-quarter report's language of "flexibly using various monetary policy tools," the second-quarter report upgraded its phrasing to "comprehensively using and timely adjusting monetary policy tools." The inclusion of "promptly planning and introducing practical and effective incremental policies" has led the market to widely believe that monetary policy will be a key driver of incremental growth-supporting measures in the second half of the year.
Earlier this year, factors like geopolitical conflicts in the Middle East caused a rapid rise in international oil and commodity prices, exerting imported inflation pressure on major global economies. As the Middle East situation and inflation data evolve, the monetary policy stance of major economies remains highly uncertain, creating some external spillover pressure on domestic policy adjustments.
In a special column of its report, the PBOC assessed that the current round of monetary policy adjustments by major central banks will be relatively moderate, with limited spillover effects. On one hand, the intensity of the energy shock is easing, meaning that even if major developed economy central banks need to raise rates, the magnitude will not be significant. On the other hand, prior to these adjustments, these central banks' policies still held some restrictiveness, so recent rate hikes are more about changes in interest rates and liquidity rather than a "major reversal" in macroeconomic policy.
With external pressures easing, the domestic monetary policy's "China-first" stance has been further reinforced. An analysis from China Galaxy Securities suggests that in the second half of the year, given both domestic and international considerations, monetary policy will place greater emphasis on a China-first approach, intensifying counter-cyclical adjustments. Policy objectives will focus more on domestic economic growth, price stability, and full employment, while international balance of payments and exchange rate stability will not become constraints on monetary easing.
Despite a market consensus on moderately loose monetary policy in the second half, opinions diverge sharply on the timing, intensity, and priority of aggregate tools like RRR and interest rate cuts. So far this year, no comprehensive RRR or interest rate cuts have been implemented, leaving room for speculation about future policy adjustments.
Wen Bin, Chief Economist at China Minsheng Bank, believes that the phrase "comprehensively use and timely adjust monetary policy tools" indicates the PBOC will act promptly based on economic conditions, employing a combination of aggregate tools like RRR and interest rate cuts alongside structural monetary policy tools, forming a "total volume + structure" dual-drive approach.
Yang Yiwei, Chief Fixed Income Analyst at Guosheng Securities, expects the probability of both interest rate and RRR cuts to increase given current liquidity conditions, fundamentals, and price levels. The "timely adjustment" language suggests further room for monetary policy operations, including RRR cuts, interest rate cuts, open market operations, and structural tools.
China Galaxy Securities notes that the third quarter is a key window for observing potential interest rate and RRR cuts. At this stage, multiple policy objectives—economic growth, full employment, and international balance of payments—all point to room for further easing. The only constraint is potential imported inflation, but this factor is also gradually shifting in a direction favorable to easing. The report points to a potential inflection point for the Producer Price Index (PPI) and notes that the Consumer Price Index (CPI) remains at a low level. The second-quarter Monetary Policy Committee meeting continues to emphasize promoting "reasonable price recovery." Under a baseline scenario, after the PPI peaks, the PBOC will have room to cut interest rates again. Additionally, with low excess reserve ratios and pressure on bank net interest margins, the PBOC has previously signaled in public that there is room for reducing the deposit reserve ratio. Combined with the upcoming peak season for government bond issuance in the third quarter, monetary policy is expected to coordinate with fiscal policy to maintain ample liquidity and smooth out excessive fluctuations in funding costs.
However, many analysts remain cautious, arguing that the time for comprehensive aggregate easing has not yet arrived. Tian Di, an analyst at Guosen Securities, previously stated that "comprehensively using various monetary policy tools" preserves operational flexibility, and while a "dual cut" (RRR and interest rates) is not ruled out, the time for full-scale implementation has not yet come. Liu Yu, Chief Economist at Industrial Securities, believes that although the renewed emphasis on "counter-cyclical adjustment" increases the probability of growth-stabilizing policies, the current stage may be an observation period for the PBOC to assess the necessity of RRR and interest rate cuts. The July Politburo meeting mentioned "promptly planning and introducing practical and effective incremental policies," and the recent report repeated this, suggesting that incremental policies may still be in the planning phase.
Against the backdrop of diverging expectations for aggregate tools, market consensus has formed around a key theme: structural monetary policy tools will be the main drivers of policy in the second half, while efficient coordination between fiscal and financial policies will be crucial for reviving domestic demand. The Politburo meeting had previously called for "optimizing the implementation of fiscal and financial policies to synergistically promote domestic demand." Analysts believe this new phrasing marks a shift from merely aligning the direction of fiscal and monetary policies to pursuing efficient linkage in tool combinations, implementation pace, and ultimate outcomes.
Ming Ming, Chief Economist at CITIC Securities, notes that relying solely on fiscal or monetary policy has diminishing marginal returns and transmission bottlenecks in boosting terminal consumption and stimulating micro-level vitality. In the current macro environment, deep integration of fiscal and financial mechanisms is particularly critical. In the future, more combined tools, such as "fiscal interest subsidies + central bank relending," may emerge, leveraging fiscal credit support and financial fund allocation to more precisely and efficiently stimulate social demand and enhance the overall effectiveness of macroeconomic policy.
The main thrust of structural tools has become clear. The report calls for "utilizing various structural monetary policy tools, continuously improving tool design and management, and strengthening financial support for key areas such as expanding domestic demand, technological innovation, and small and micro enterprises." In the first half of the year, the PBOC expanded its structural monetary policy toolkit by lowering rates, increasing quotas, and broadening the scope of application for targeted lending to key sectors. By the end of the first half, loans to the technology, green, inclusive finance, elderly care, and digital economy sectors grew by 12.6%, 14.5%, 7.8%, 23.5%, and 15.1% year-on-year, respectively, all outpacing the average growth rate of overall loans.
Looking ahead, there is room for further strengthening of structural tools. Liu Yu notes that from March to June, as overall loan growth slowed, the growth rates of loans to the technology, green, inclusive finance, elderly care, and digital economy sectors also decelerated to varying degrees. This may indicate that structural tools could continue to be intensified. Additionally, the report added new language about "strengthening financial support to boost and expand consumption, and promoting the expansion and quality improvement of the service sector," suggesting that financial support for consumption could be a key focus of subsequent policy.
Ming Ming believes that the report's requirement to "continuously improve tool design and management" reflects attention to the "design" of tools, which may correspond to the possibility of exploring and establishing new structural tools for specific areas. It is expected that structural tools will remain an important medium for financial support of the real economy in the coming period.
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