Goldman Sachs removes its forecast for a 2026 policy rate cut in China, still sees room for an RRR cut

Overview

This report interprets the first-quarter Monetary Policy Committee statement from the People's Bank of China. Goldman Sachs believes the meeting maintained an accommodative tone, but the wording indicates that policy is placing more emphasis on prudent calibration, targeted credit support, and lowering financing-related costs rather than directly cutting policy rates. Based on better-than-expected recent economic activity data in China, relatively strong resilience to external shocks, and the possibility that PPI may turn positive, the report removes policy rate cuts in 2026 from its base case.

Core views

The key views are: first, the PBOC remains within an accommodative framework, but is leaning more toward structural tools and targeted support; second, stronger emphasis on financing costs suggests the central bank is more cautious about cutting policy rates; third, there is no clear catalyst for a rate cut in 2026, and Goldman Sachs has removed its prior forecast for a 10 bp cut in the third quarter; fourth, an RRR cut remains an important option for supporting liquidity and fiscal easing, while the central bank can also use OMO, MLF, outright reverse repos, and government bond purchases to keep liquidity ample.

Analysis framework

The report assesses policy communication changes and their impact on the rate path by comparing the first-quarter Monetary Policy Committee statement, the fourth-quarter monetary policy implementation report, and recent macro data. The analysis focuses on policy wording, structural monetary policy tools, financing cost language, January-February economic activity, the relative impact of the Hormuz disruption on China, and PMI signals for PPI.

Methodology notes

• Macro policy analysisPolicy communication and data-dependence framework

  Use central bank meeting wording and recent macro data to infer the policy rate path

  If policy communication emphasizes calibration and targeted support while growth and inflation data improve, the need for policy rate cuts declines.

• Liquidity tool analysisRRR cut versus open market tools comparison

  Differentiate high-visibility RRR cuts from other liquidity injection tools

  An RRR cut can complement fiscal easing and send a policy signal, but OMO, MLF, outright reverse repos, and government bond purchases can also keep liquidity ample.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China rates market

  Directly affected by the PBOC policy rate and liquidity tools

  Strengths

  If liquidity remains abundant, short-end rates still have policy support.

  Weaknesses

  Removing the rate cut forecast weakens the base-case support for further downside in policy rates.

  Comparison

  Compared with direct rate cuts, RRR cuts and liquidity tools may have a more quantity-based and structural impact on the yield curve.

  Risks

  If growth weakens materially or external shocks intensify, rate cut expectations could re-emerge.

• China banking system

  Affected by RRR cuts, financing costs, and structural credit support

  Strengths

  RRR cuts help release long-term funding and support credit extension.

  Weaknesses

  If policy focuses more on lowering financing costs, bank net interest margins may remain under pressure.

  Comparison

  Structural tools are more targeted toward specific sectors than broad-based rate cuts.

  Risks

  An economic slowdown or weaker exports could raise credit risk and alter the policy path.

• China government bonds

  Affected by rate cut expectations, liquidity, and the central bank's government bond purchase tool

  Strengths

  Ample liquidity and potential government bond purchases can provide support.

  Weaknesses

  Lower rate-cut expectations may limit further downside in yields.

  Comparison

  The signaling effect of an RRR cut on the bond market is usually weaker than a direct policy rate cut.

  Risks

  If PPI turns positive and growth resilience continues, the room for bond yields to decline may be limited.

Key data

• Q1 MPC meeting date2026-03-26The statement was released on 2026-03-31.
• Removed rate cut forecast10bpThe previous forecast was for a 10 bp policy rate cut in the third quarter of 2026.
• Retained RRR cut forecast50bpGoldman Sachs still sees an RRR cut as a tool to support liquidity and fiscal easing.
• Policy backdropActivity data in January-February beat expectations, and March PPI may turn positiveThese factors reduce the near-term need for further rate cuts.

Impact & implications

For markets, the report implies that China's policy rate downside in 2026 may be smaller than previously expected, and expectations for the yield curve and financing costs will need stronger data weakening or external shocks to reprice rate cut expectations. For macro assets, liquidity may remain ample, but policy support is more likely to come through RRR cuts, structural tools, and open market operations.

Risks

• If the Hormuz disruption persists and triggers a global economic slowdown, it could weigh on China's exports and reintroduce the case for rate cuts.
• If subsequent economic activity data weaken materially, the current base case of no rate cut may need to be revised.
• The central bank may rely more on OMO, MLF, outright reverse repos, or government bond purchases, reducing the certainty of an RRR cut as the sole tool.
• Changes in policy communication may cause volatility in market pricing of the rate path.

What to watch

• Whether subsequent PBOC monetary policy implementation reports and MPC statements continue to emphasize calibration and targeted support.
• Whether activity data after January-February can sustain the stronger-than-expected growth momentum.
• Whether March and later PPI readings turn positive and keep improving, as PMI signals suggest.
• The impact of the Hormuz disruption on global growth, China's exports, and policy responses.
• The actual pace of use of tools such as RRR cuts, OMO, MLF, outright reverse repos, and government bond purchases.