SHANGHAI/SINGAPORE – China’s central bank lowered a short-term lending rate for the first time in 10 months on Tuesday, in a bid to restore market confidence and prop up a stalling post-pandemic recovery in the world’s second-largest economy.
Recent economic data has shown subdued demand and weaker investor sentiment, raising expectations that authorities will ease monetary policy to sustain growth.
The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.9 percent from 2 percent on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.
“The central bank’s rate cut decision was not a complete surprise to the market,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“Commercial banks have already lowered deposit rates, and PBOC governor Yi Gang also mentioned strengthening counter-cyclical adjustment recently.”
READ: China’s biggest state banks cut deposit rates
He added that the PBOC may have wanted to soften the impact of future policy easing on the Chinese yuan ahead of the Federal Reserve’s policy meeting this week.
An interest rate cut in China could further widen the yield gap with the United States, even if the Fed pauses this month.
A change in China’s seven-day repo rate typically signals changes in longer-term rates are likely.
The yuan eased to 7.1646 per dollar after the rate decision, the weakest since Nov. 29, 2022.
“The 10bp cut in the open market operations (OMO) reverse repo rate can be seen as a precursor to a MLF rate cut this Thursday,” said Frances Cheung, rates strategist at OCBC Bank.
“Rates may continue to trade on the soft side but given much economic pessimism and a rate cut are already in the price, we see limited downside to rates from here.”
China is due to roll over a 200 billion yuan medium-term lending facility loan on Thursday.
($1 = 7.1437 Chinese yuan)
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