China cuts short-term borrowing costs to support recovery

  • PBOC lowers 7-day reverse repo to 1.9% from 2.0% previously
  • PBOC cuts 7-day reverse repo rate by 10 bps
  • PBOC’s decision shows concerns about the health of the economy – analysts
  • MLF rate and LPR can be lowered by the same margin – analysts

SHANGHAI/SINGAPORE, June 13 (Reuters) – China’s central bank cut a short-term lending rate for the first time in 10 months on Tuesday to help restore market confidence and shore up a stalling post-pandemic recovery in the world’s second-largest economy.

The cut in the lending rate signals possible easing of long-term rates over the next week and beyond as demand and investor sentiment weaken, 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 as 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 currency strategist at Mizuho Bank.

“Commercial banks have already lowered deposit rates, and PBOC Governor Yi Gang also mentioned strengthening countercyclical adjustment recently.”

The yuan hit a six-month low of 7.1680 per dollar after the rate decision, while yields on China’s benchmark 10-year government bond fell to a fresh 7-1/2-month low.

Cheung said the PBOC may have wanted to cushion the impact of any future policy easing on the Chinese yuan ahead of the Federal Reserve’s policy meeting this week, which is closely watched by financial markets.

China remains an outlier among global central banks as it loosens monetary policy to support growth, while its biggest rivals raise interest rates to counter rising consumer prices.

Further rate cuts in China will only widen the yield gap with the US, even if the Fed takes a break this week, sending the yuan lower and accelerating capital outflows.

China is due to release May credit lending data and activity indicators, including retail sales and industrial production, this week.

Tuesday’s rate cut suggests policymakers are increasingly worried about the health of China’s recovery, traders and analysts said.

“This reminds the market of the challenges that the Chinese economy is facing in its recovery period,” said Marco Sun, chief financial market analyst at MUFG Bank (China).

“However, the market expects the PBOC to cut the policy rate further. Looking ahead, the PBOC may make marginal adjustments to the policy rate to stimulate credit growth and avoid inflationary problems in the coming quarters.”

Bloomberg reported on Tuesday, citing unnamed sources, that China is considering at least a dozen stimulus measures including interest rate cuts to support areas such as real estate and domestic demand.

The next adjustment in interest rates could come as soon as Thursday, when the central bank will roll over 200 billion yuan ($27.93 billion) in medium-term lending facilities (MLF).

“The 10bp cut in the reverse repo rate for open market operations (OMO) can be seen as a precursor to a rate cut in the MLF this Thursday,” said Frances Cheung, fixed income strategist at OCBC Bank.

“Interest rates may continue to trade on the soft side, but given a lot of economic pessimism and a rate cut is already in the price, we see limited downside to interest rates from here.”

Separately, markets expect the benchmark lending rate (LPR), which is used to set consumer and mortgage rates, to be cut by the same margin at the monthly setting next Tuesday.

And some investment banks expect a 25 bp reduction in the reserve requirement ratio, or the amount of cash banks must set aside as reserves, this year.

“There may be less urgency to cut RRR following these policy rate cuts … we now believe that the 25bp RRR cut we had previously forecast for June is likely to be delivered in the third quarter instead,” Goldman Sachs economists said in a Note.

“There could be another RRR or policy rate cut in Q4, depending on economic performance over the next few months.”

($1 = 7.1610 Chinese Yuan)

Reporting by Winni Zhou and Tom Westbrook; Editing by Sam Holmes and Jacqueline Wong

Our standards: Thomson Reuters Trust Principles.

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