China’s yuan weakens after the central bank cuts a key short-term interest rate

The People’s Bank of China cut a key short-term lending rate on Tuesday as it deals with disappointing economic data in the country after a Covid-19 reopening failed to gain momentum.

The PBOC cut its seven-day reverse repo rate by 10 basis points from 2% to 1.9%, according to a central bank statement, and injected 2 billion Chinese yuan ($279.97 million) through its seven-day repos. A repurchase agreement (repo) is a type of short-term loan interest rate.

This is the central bank’s first move since August and follows the country’s biggest banks which cut deposit rates last week, signaling that further monetary policy easing is in store.

The move comes ahead of the PBOC’s interest rate decision on the medium lending facility, which is expected to be announced on Thursday. Meanwhile, the bank’s prime rate is scheduled for release on 20 June.

The onshore Chinese yuan weakened 0.25% to 7.1618 against the US dollar shortly after the move on Tuesday and held to its weakest levels since November.

“Now we’re going to see the Chinese [monetary] policy will become more supportive,” Atlantis chief investment officer Yang Liu told CNBC’s “Street Signs Asia.”

“Basically what the Chinese government is [expected] to do [is] to try very hard to support domestic consumption, especially in the private sector,” she said.

UBS Global Wealth Management also expects further easing of policy going forward, it says in its outlook report from June. “We believe monetary policy will continue to focus on keeping liquidity abundant and credit growth stable,” it said, predicting the central bank to deliver one to two “modest” cuts or a 5 to 2 cut in the medium lending facility rate. 10 basis points in the second half of this year.

“However, larger steps could exacerbate currency pressures, which policymakers want to avoid, and come with diminishing returns if not accompanied by demand stimulation,” it said.