Headquarters building of People's Bank of China.
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China's central bank unexpectedly trimmed a closely monitored lending rate on Monday, the first such cut in more than four years, and a signal to markets that policy makers are ready to act to support slowing growth.
The People's Bank of China (PBOC) stated on its website that it lowered its seven-day buyback rate to 2.50% from 2.55%.
The move cheered China's bond market and comes just two weeks after the PBOC cut its medium-term loan facility (MLF) borrowing costs, used by banks for longer-dated financing needs, by the same margin.
Both cuts increase the likelihood that PBOC will trim its new reference mortgage interest rate (LPR), many of which lenders base their mortgage rates this week in an effort to free up funds for credit-starved parts of the economy.
Analysts say that the unexpected cut on Monday also shows that the central bank is concerned about easing investor concerns about higher inflation distribution would prevent it from delivering fresh stimulus.
Zhou Hao, Commerzbank economist in Singapore, said that the reverse repo rate indicates a change in policy in the coming months, including "some fine-tuning to prioritize pro-growth policy for now." [1
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There had been some concerns the PBOC may be limited in its efforts to facilitate policy. In a report released Saturday, the PBOC said it would maintain sound monetary policy to prevent inflation from spreading.
However, market participants believe the two recent market interest rates suggest a similar adjustment in LPR this week.
Yan Se, chief economist at Founder Securities in Beijing, said that reverse repo rate cuts showed that governments were open to using open market operations, usually used to meet the financial system's daily financing needs, to stimulate long-term growth in the real economy.
Commercial banks are evaluating extensive funding costs to determine LPR, so lowering the reverse repo rate can maintain monetary policy stability, "Yan said.
" Given such a situation, a five basis point reduction in LPR is a high probability "A reduction in banks' reserve requirements (RRRs) is also possible, he added.
Similarly, Commerzbanks Zhou expects a targeted RRR cut before the end of this year.
PBOC announced its monthly LPR determination on Wednesday. the one-year fix is now at 4.2%, while the five-year period is at 4.85%.
Monday's repayment reduction strengthened the bond market, with China's benchmark 10-year futures delivery for December by more than 0.4% in the morning session.  Julian Evans-Pritchard, senior China economist at Capital Economics, said Monday's reverse repo rate cut is a step to lower marginal funding costs for banks, so m depend on repo as a source of short-term liquidity.
"With economic growth still slowing and probably not bottoming out in the short term, we believe the PBOC will take further steps to increase lending, which has weakened lately," he said in a note, and expected another 70 basis point cut to the seven-day reverse repo rate by mid-next year.
The PBOC had skipped reverse repo operations for 15 straight trading days before injecting 180 billion yuan ($ 25.74 billion) into the interbank market on Monday.