SHANGHAI/SINGAPORE: The People’s Bank of China on Tuesday cut short-term lending rates for the first time in a decade in a bid to restore market confidence and boost the world’s second-largest economy’s sluggish post-pandemic recovery.
Recent economic data have shown weak demand and weak investor sentiment, raising hopes that authorities will loosen monetary policy to sustain growth.
The People’s Bank of China (PBOC) on Tuesday injected 2 billion yuan ($279.97 million) through short-term bonds, cutting its 7-day reverse repo rate by 10 basis points from 2.00% to 1.90%.
“The central bank’s decision to cut rates was not a complete surprise to the market,” said Ken Chan, chief Asian FX strategist at Mizuho Bank.
“Commercial banks have already cut deposit rates, and People’s Bank of China Governor Yi Gang also recently mentioned strengthening countercyclical adjustments.”
He added that the central bank may have wanted to soften the impact of future policy easing on the yuan, ahead of the Federal Reserve’s policy meeting this week.
Even if the Fed pauses this month, China’s rate cut could widen the yield spread with the U.S. even further.
A change in China’s 7-day repo rate usually signals a possible change in long-term interest rates.
After the interest rate decision, the yuan fell to 7.1646 to the dollar, its lowest since November 29, 2022.
“A 10 basis point cut in the open market operations (OMO) reverse repo rate is seen as a precursor to the MLF rate cut this Thursday,” said Francis Chan, rate strategist at OCBC Bank.
“Rate rates may continue to be soft, but with much economic pessimism and rate cuts already priced in, we see limited downside from here on rates,” he said.
China plans to roll over 200 billion yuan of medium-term loan facility loans on Thursday.
(1 US Dollar = 7.1437 Chinese Yuan)
https://www.channelnewsasia.com/business/chinas-central-bank-cuts-short-term-borrowing-cost-first-time-aug-3557726 People’s Bank of China cuts short-term borrowing costs for first time since August