- PBOC reduced the 7-day reverse repo to 1.9% from 2.0% earlier
- PBOC cuts 7 day reverse repo rate by 10 bps
- PBOC’s decision shows concern about the health of the economy – analyst
- MLF rate and LPR can be reduced by similar margin – Analyst
SHANGHAI/SINGAPORE, June 13 (Reuters) – China’s central bank slashed short-term lending rates for the first time in 10 months on Tuesday in a bid to help restore confidence in markets and the recovery after the world’s second largest pandemic. can gain momentum. economy.
The lending rate cut signals a possible easing of long-term rates next week and beyond as demand and investor sentiment weaken, raising the case for immediate policy stimulus to sustain growth.
The People’s Bank of China (PBOC) on Tuesday cut its seven-day reverse repo rate by 10 basis points from 2.00% to 1.90%, while it injected 2 billion yuan ($279.97 million) through a short-term bond instrument Planted.
“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 Yi Gang, the governor of the PBOC, also recently mentioned strengthening counter-cyclical adjustments.”
The yuan fell to a six-month low of 7.1680 per dollar after the rate decision, while the yield on China’s benchmark 10-year government bond fell to a 7-1/2-month low.
Cheung said the PBOC wanted to minimize the impact of any future policy easing on the Chinese yuan ahead of the Federal Reserve’s policy meeting this week, which is keenly watched by financial markets.
China remains an outlier among global central banks as it loosens monetary policy to boost growth while its major counterparts raise interest rates to combat rising consumer prices.
Further interest rate cuts in China will only widen the yield gap with the United States, even if the Fed pauses this week, undermining the yuan and accelerating capital outflows.
China is due to release May credit lending data and activity indicators, including retail sales and industrial production, this week.
Traders and analysts said Tuesday’s rate cut showed policymakers are concerned about the health of China’s recovery.
“It reminds the market of the challenges that the Chinese economy faces during its recovery period,” said Marco Sun, chief financial markets analyst at MUFG Bank (China).
“However, the market is expecting a further cut in the policy rate from PBOC. Looking forward, PBOC may make modest adjustments in the policy rate in the coming quarters to stimulate credit growth and avoid inflation issues.”
China is considering at least a dozen stimulus measures, including interest rate cuts, to support sectors such as real estate and domestic demand, Bloomberg reported on Tuesday, citing unnamed sources.
The next adjustment in rates could happen as soon as Thursday, when the central bank is due to roll in more than 200 billion yuan ($27.93 billion) in medium-term lending facility (MLF) loans.
“The 10 bp cut in the open market operations (OMO) reverse repo rate could be seen as a precursor to the MLF rate cut this Thursday,” said Francis Cheung, rates strategist at OCBC Bank.
“Rates may continue to trade on the soft side, but with much economic pessimism and a rate cut already priced in, we see limited downside in rates from here.”
Separately, markets expect the benchmark lending loan prime rate (LPR), which is used to set consumer loan and mortgage rates, could be reduced by the same margin in a monthly fixing next Tuesday.
And some investment banks expect the reserve requirement ratio to decrease by 25 bp, or the cash banks will have to set aside as reserves this year.
Economists at Goldman Sachs said in a statement, “These policy interest rate cuts may reduce the urgency to cut RRR … We now think the 25 bp RRR cut we previously estimated for June was expected to be delivered in the third quarter.” Comment.
“There could be another RRR or policy interest rate cut in Q4 depending on the economic outcome over the next several months.”
($1 = 7.1610 Chinese Yuan)
Reporting by Winnie Zhou and Tom Westbrook; Editing by Sam Holmes and Jacqueline Wong
Our Standards: The Thomson Reuters Trust Principles.