(Bloomberg) -- The yuan’s slump to the weakest since the global financial crisis in 2008 has fueled speculation China’s central bank will slow the pace of monetary easing to avoid adding further pressure on the currency.

The People’s Bank of China will probably delay any major stimulus moves, like lowering interest rates and the reserve requirement ratio for banks, according to analysts including from Australia & New Zealand Banking Group Ltd. and Tianfeng Securities Co.

That would further complicate the government’ efforts to shore up an economy battered by Covid outbreaks and a property crisis. Economists surveyed by Bloomberg expect gross domestic product growth to slow to just 3.4% this year -- which outside of 2020 would be the slowest pace in more than four decades.  

The PBOC’s policy divergence with a hawkish US Federal Reserve has fueled capital outflows and driven the yuan lower. China’s central bank has ramped up its defense of the currency, setting stronger daily fixings for the yuan and making it more expensive to bet against the yuan. 

Former officials have expressed concern about the currency turmoil, with an ex-PBOC adviser warning about harms the Fed’s aggressive rate hikes are doing to global financial markets and other economies.

Guan Tao, a former official with the State Administration of Foreign Exchange, over the weekend also urged policymakers to make more careful use of the room for further fiscal and monetary stimulus, as well as improve policy focus and effectiveness. They should not “fire blank shots,” he said at a forum. 

The onshore yuan weakened to 7.2307 per dollar as of 3:15 p.m. local time on Wednesday, a level unseen in 14 years, while the offshore unit slid to the lowest level in data going back to 2010.

Here’s a look at what analysts say are the implications of the yuan’s depreciation on China’s monetary policy outlook.

Betty Wang, senior China economist at Australia & New Zealand Banking Group Ltd. 

“The PBOC has been seeking to slow the pace of depreciation in the past few weeks, especially when the pair moves too quickly,” she said Wednesday. “On the monetary side, the quick depreciation limits the room for PBOC to cut rates in the near future.”

The bank forecasts no interest rate cuts in the fourth quarter, but sees possible RRR reductions to fill in any liquidity gap.

Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.

“The room for further monetary policy easing, particularly in terms of interest rate cuts, is quite limited,” he said. “The effectiveness of monetary easing is also questionable.”

While monetary policy “helps on the margin” in addressing troubles stemming from the property sector and Covid outbreaks, which are the main challenges China faces, “it cannot resolve these problems just by relying on rate cuts.”

Tianfeng Securities Co. analysts led by Sun Binbin

“It can’t be ruled out that the rhythm and magnitude of the PBOC’s future actions may be affected,” the analysts wrote in a note Tuesday. The gap between the year-on-year growth rate of M2 and that of China’s foreign exchange reserves is worth monitoring for clues about potential PBOC moves.

“The PBOC has to control the pace of M2 growth,” they wrote. “The market has become worried about the prospects of a cut in the reserve requirement ratio in October” because the measure would have a significant impact on the expansion of broad money supply.

The likelihood of another interest rate cut within this year was “already low” as total social financing could recover slightly before October. The need to balance domestic monetary easing and foreign exchange policies has only made that even less likely.

Citic Securities Co. analysts including Ming Ming 

“Changes in the yuan’s rate have contained the room for speculation on monetary easing,” they wrote in a Tuesday note discussing causes for corrections in China’s bond market this month. 

Investor confidence was also dampened by the PBOC’s recent net withdrawal of one-year policy loans from the financial system, they said.

While a RRR cut is still possible, “what we have to acknowledge is it may not land in October due to the current cash conditions and the yuan’s exchange rate.”

Shenwan Hongyuan Securities Co. analyst Meng Xiangjuan

“Expectations on monetary easing in the short term have cooled due to August’s rate cut, a depreciating yuan and low volumes of reverse repo operations” by the central bank, she wrote in a note on Monday after market.

“Domestic policies are facing rising constraint as the dollar continues to strengthen and US bond yields spike, resulting in widening yield gap between China and the US and intensifying downward pressure on the yuan.”

(Adds comments from ex-officials in the fifth and sixth paragraphs.)

©2022 Bloomberg L.P.