SHANGHAI/SINGAPORE (Reuters) – China’s central bank on Tuesday cut its short-term lending rate for the first time in 10 months, in a bid to restore market confidence and support a stalled recovery after the outbreak of the pandemic, the second of its kind in the world. – the largest economy.
The cut in the lending rate suggests the potential for long-term rate easing over the next week and beyond as demand and investor sentiment weakens, adding to the case for urgent policy stimulus to sustain growth.
The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.
“The central bank’s decision to cut the interest rate was not a complete surprise to the market,” said Ken Cheung, chief Asian currency analyst at Mizuho Bank.
“Commercial banks have already cut deposit rates, and Governor Yi Gang of the People’s Bank of China also pointed to strengthening counter-cyclical adjustment recently.”
The yuan hit a six-month low of 7.1680 per dollar after the interest rate decision, while benchmark Chinese government bond yields for 10 years fell to a new seven-and-a-half-month low.
Cheung said the People’s Bank of China may have wanted to mitigate the impact of any future easing policy on the Chinese yuan ahead of the Fed’s policy meeting this week, which financial markets are watching with interest.
China remains aloof from global central banks as it eases monetary policy to support growth while its major peers raise interest rates to counter rising consumer prices.
Further rate cuts in China would only widen the yield gap with the US, even if the Fed pauses this week, driving the yuan lower and accelerating capital outflows.
China is due to release data on credit lending and activity indicators for May, including retail sales and industrial production, this week.
Traders and analysts said Tuesday’s rate cut indicated that policymakers are increasingly concerned about the health of China’s recovery.
“It reminds the market of the challenges that the Chinese economy faces during the recovery period,” said Marco Sun, senior financial market analyst at MUFG Bank (China).
“However, the market expects the PBOC to cut interest rates further. Looking ahead, the PBOC can make marginal policy rate adjustments in order to stimulate credit growth and avoid inflation problems in the coming quarters.”
The next adjustment to rates could come as soon as Thursday, when the central bank is set to rollover 200 billion yuan ($27.93 billion) in medium-term lending facility (MLF) loans.
“A 10 basis point cut in the reverse open market operations (OMO) repo rate can be seen as a precursor to this Thursday’s MLF rate cut,” said Francis Cheung, interest rate analyst at OCBC Bank.
“Interest rates may continue to trade on the weak side but because there is a lot of economic pessimism and rate cuts already, we see limited downside to rates from here.”
Separately, markets expect the lending prime rate (LPR), which is used to set rates for consumer and mortgage loans, to be cut by the same margin at the monthly fixing next Tuesday.
“Similar rate cuts to the MLF and LPR are likely to follow next Thursday and Tuesday, given that all three policy rates typically move in tandem,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
($1 = 7.1610 CNY)
(Reporting by Winnie Zhou and Tom Westbrook) Editing by Kim Coghill and Sam Holmes
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