Research Team at Goldman Sachs, suggests that the PBOC’s Q4 monetary policy report released over the weekend suggests that RRR cuts could add to depreciation pressure on the RMB and warns against largescale monetary easing. Key Quotes “Over a longer horizon, however, the report signals a moderately dovish bias, in our view. The monetary policy report contains few surprises. It indicates that the weighted average interest rate of general bank loans fell further to 5.64% in December, a drop of 37bp since September and 128bp since December 2014. The report also gives a bit more elaboration on the Macro-Prudential Assessment Framework (MPA) that was announced in December. The framework is said to be an upgrade of the long-standing dynamic differentiated reserve requirement, allowing the PBOC to refine RRR for individual banks based on a combination of macroeconomic conditions and an expanded range of (seven) prudential standards for each bank, including capital adequacy, broader asset considerations (including not only loans, but also bonds, other investment and repo assets), liquidity conditions, asset quality, cross-border funding reliance, pricing rationality, and adherence to national credit policy (e.g., degree of support for underserved sectors). On the near-term monetary policy outlook, the report has a box suggesting that a RRR cut could pose downward pressure on interest rates and amplify expectations of monetary easing, which would in turn compound depreciation pressure on the RMB exchange rate. This language is consistent with the widely reported (e.g., Reuters, January 22, 2016) though not officially announced PBOC communication to the biggest lenders, and points to reduced likelihood of significant monetary easing in the near term, in our view. Farther ahead, however, the monetary policy report reiterates PBOC’s intention to create a “neutral and appropriate” monetary environment for structural reforms, and includes a new half-sentence of “ensuring aggregate demand management” to facilitate supply-side reforms, which we think signals a moderately dovish bias over a longer horizon.” For more information, read our latest forex news.