(Bloomberg) -- China’s central bank may have more room to cut interest rates in the second quarter as the risk of another Covid wave looms in coming months and the US Federal Reserve ends its interest rate hikes, according to a prominent Chinese economist.

The People’s Bank of China could face less constraints on easing policy in the next quarter, said Zhong Zhengsheng, chief economist at Ping An Securities Co., adding that domestic inflation will likely stay weak. Zhong has previously consulted with Premier Li Keqiang on government policy.

The rapid rebound in economic activity since China dropped its Covid Zero policy and infections began easing means there’s less need for additional monetary stimulus in the short term, he said.

“The second quarter will be a window to cut the medium-term lending facility rate if a second wave of Covid infections take place in three to six months and brings an outsize shock to the economy,” Zhong said in an interview. 

The PBOC has signaled it will keep monetary policy relatively loose this year to help the economy’s recovery. Some economists forecast a cut in the rate on the one-year MLF loans in the first quarter, although none surveyed by Bloomberg predict a reduction next week, when the PBOC conducts its monthly MLF operation. 

Interest rates aren’t a must-use tool this year, said Zhong, adding that the room for further easing is already narrow since the MLF rate stands at 2.75%. 

He said the PBOC will likely push ahead with plans to reform deposit rates, which could reduce costs for banks and help drive down their loan prime rates. It may also lower the amount of cash banks must hold in reserve, or the reserve requirement ratio, by a total of 50 to 100 basis points in 2023 to fill gaps in interbank liquidity and drive stable broad money growth. 

The middle of the year and the fourth quarter are likely windows for RRR cuts, he said, as interbank liquidity could be tight and a large amount of MLF loans will mature then.

The central bank could also rely more on structural tools that complement fiscal policy to maintain credit growth, such as relending programs to support infrastructure financing, Zhong said. 

Core inflation, which excludes volatile food and energy prices, is likely to be under control this year because household balance sheets have been damaged and it will take time for them to be more willing and able to spend, he said. A weak property market will help keep rent stable, and the supply of labor still exceeds demand, according to Zhong, who forecasts inflation for the full year to be 1.7%.

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