China trims short-term borrowing costs to boost market confidence amid slowing economy
3 min read 13 Jun 2023, 09:28 AM ISTTo restore market confidence, China's central bank announced to lower a short-term lending rate for the first time in 10 months on Tuesday
PremiumTo cope with the wobbling market confidence post-pandemic, China's central bank lowered a short-term lending rate for the first time in 10 months on Tuesday. The move is expected to be succeeded by a possible easing for longer-term rates over the next week.
The reduction in short-term lending rates will help the country to prop up a stalling economy post-pandemic and provide a policy impetus to sustained growth. The expected longer-term rate cut can also be extended based on demand and investor sentiments. The next adjustment to rates is expected to come in the next two days.
"The 10bp cut in the open market operations (OMO) reverse repo rate can be seen as a precursor to an MLF rate cut this Thursday," said Frances Cheung, rates strategist at OCBC Bank.
Earlier, the People's Bank of China (PBOC) had injected 2 billion yuan trimmed ($279.97 million) by opting short-term bond instrument. On Tuesday, the central bank announces its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00%.
"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 PBOC governor Yi Gang also mentioned strengthening counter-cyclical adjustment recently."
China's currency at a six-month low after rate cut
China's currency hit a six-month low of 7.1680 per dollar after the rate decision whole yields on China's benchmark 10-year government bonds fell to a fresh 7-1/2-month low.
According to Ken Cheung, the rate cut was an attempt of the bank to guard the economy against the impact of any future policy measure on the Chinese yuan. Notably, the Federal Reserve is going to conduct its policy meeting this week, which will be keenly observed by the financial markets.
China continues to be a major outlier
In contrast with its global peers' hawkish stance, China continues to remain an outlier among global central banks. Beijing opted to loosen monetary policy to shore up growth. Moreover, future interest rate cuts would help the country in widening the yield gap with the United States, despite rate pause by Fed this week. This will help the yuan maintain its low value and accelerate capital outflows.
The rate cut suggests policymakers are stressed about China's economy
China is yet to release May credit lending data and activity indicators, including retail sales and industrial production, this week. The recent rate cut hints at policymaker's worry about China's recovery, according to analysts.
"This reminds the market of the challenges that the Chinese economy faces during its recovery period," said Marco Sun, chief financial market analyst at MUFG Bank (China).
“However, the market is expecting the PBOC to cut the policy rate further. Looking ahead, the PBOC could make marginal adjustments to the policy rate to stimulate credit growth and avoid inflation issues in the coming quarters."
Some expectations for lending loan prime rate (LPR), which is key to setting consumer loan and mortgage rates, could be lowered by the same margin at the monthly fixing next Tuesday.
(With inputs from Reuters)
This story has been published from a wire agency feed without modifications to the text.