The People’s Bank of China (PBOC) is projected to increase monetary easing in the second quarter of 2025, as indicated by a Reuters poll suggesting a 15 basis point reduction in the loan prime rate (LPR) and a minimum 25 basis point cut to the reserve requirement ratio (RRR). Analysts from Citi anticipate expedited domestic stimulus measures in response to growing external pressures, predicting an additional fiscal funding of approximately 1.5 trillion yuan (around $205 billion) by mid-2025.
In March, new fiscal measures were announced, including a higher budget deficit target, signalling forthcoming support. The Politburo is set to meet later this month to discuss the near-term policy agenda. The PBOC has expressed its commitment to adjusting interest rates and RRR as needed, having already enacted a 50 basis point RRR reduction in September, with further easing seen as essential to support domestic demand.
Monetary Response From Beijing
The current signals from Beijing are abundantly clear: the central monetary authority is preparing to speed up its efforts to support credit availability and drive internal consumption higher. With borrowing costs likely to fall further and more liquidity projected to be injected into financial institutions, conditions are forming that allow for heightened strategic agility.
The response from policymakers follows a pattern that we’ve seen before: increased external strain acts as a prompt for fiscal broadening. The expected 15 basis point drop in lending benchmarks, paired with a deeper cut to reserve requirements, gives financial actors a narrower window to react before pricing begins to adjust. Although the coming policy meeting is yet to materialise, previous shifts in tone from high-level meetings have usually given us reliable context ahead of actual structural moves.
Wang and his colleagues at Citi point to an additional pool of fiscal backing via bond issuance. When that money begins flowing into targeted infrastructure and industrial activity, it will raise the probability of early adjustments in forward guidance. That type of stimulus generally brings about reactions in both short-term interest rates and mid-curve positioning, with trade volumes and implied volatility often ticking higher. These are situations where time is not your ally, as the pricing in of policy adjustments frequently begins well before public signals go out.
Indicators Of Policy Adjustment
Early-year measures, including a larger budget deficit target, indicate that authorities are willing to accept short bursts of higher funding costs if they help cushion an economy still facing headwinds. If the Politburo confirms this broader fiscal stance—especially if it reassures markets about the financing path—then there is room for momentum in longer-dated instruments, especially those sensitive to liquidity conditions.
For us, what matters now is how expectations are being built into option skew and futures roll behaviour. Too many participants will attempt to forecast rate paths using linear models or rely too heavily on past slowdowns—the present context calls for responsiveness, not comfort in past templates. When central banks shift tone with such consistency, there’s little point in waiting around for confirmation.
The People’s Bank’s continuous readiness to lower financial thresholds—demonstrated by September’s bold action—offers a measurable case for the repricing of term risk. If you’re watching delta sensitivity, now is hardly the time to assume lower realised volatility. The lack of hesitation from authorities in early moves shows they are not operating under constraints common in Western central bank models. They can afford to be more preemptive, which means we must be quicker to respond.
In the coming sessions, attention must be given to how funding channels adjust, especially interbank liquidity and repo curve steepness. If additional easing is priced in before it arrives, risk-neutral positioning has to be executed in advance. With that in mind, assessing convexity exposure and preparing hedges goes from optional to necessary.
