The headquarters of the People’s Bank of China (PBOC), the central bank, is shown in Beijing, China September 28, 2018. REUTERS/Jason Lee
Sign up now for FREE, unlimited access to Reuters.com
Sign up
SHANGHAI, Aug 15 (Reuters) – China’s central bank unexpectedly cut a key interest rate for the second time this year and pulled some cash from the banking system on Monday to try to revive demand for credit to support the economy affected by COVID.
Economists and analysts said they believe Chinese authorities are willing to prop up the sluggish economy by allowing greater policy divergence with other major economies that are raising interest rates aggressively.
The People’s Bank of China (PBOC) said it was cutting the rate on 400 billion yuan ($59.33 billion) of one-year loans from the Medium Term Lending Facility (MLF) to some financial institutions by 10 basis points (bp) up to 2.75%. of 2.85%.
Sign up now for FREE, unlimited access to Reuters.com
Sign up
In a survey of 32 market watchers last week, all respondents had forecast that the MLF rate would remain unchanged and 29 had forecast that there would be a partial renewal. Read more
“The rate cut surprises us,” said Xing Zhaopeng, senior China strategist at ANZ.
“It should be a response to Friday’s weak credit data. The government remains cautious on growth and will not let go.”
New bank lending in China fell more than expected in July, while broad credit growth slowed as new COVID outbreaks, employment concerns and a deepening crisis real estate made companies and consumers wary of taking on more debt. Read more
The PBOC attributed its move to “maintaining reasonably ample liquidity in the banking system.” And with 600 billion yuan of MLF loans maturing, the operation resulted in a net withdrawal of funds of 200 billion yuan.
Market participants have largely priced in the partial renewal as the banking system was already flush with cash, with interbank cash rates at two-year lows and persistently below policy rates.
“Now, with hindsight, today’s 10 basis point cut can be seen as a ‘front-loading’ before policy room narrows in the future as the PBOC sees pressure from structural inflation,” said Frances Cheung, rate strategist at OCBC Bank.
The PBOC reiterated that it would step up the implementation of its prudent monetary policy and maintain reasonably ample liquidity, while closely monitoring changes in domestic and external inflation, it said in its second-quarter monetary policy report.
“Despite the inflation risk warning and the liquidity situation, the dominant downside risks under the spread of COVID and the rout of the real estate sector prompted the PBOC to cut rates to stimulate demand,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank.
China’s 10-year Treasury futures rose more than 0.7 percent in early trade after the rate decision, while yields on the same level sovereign bonds fell about 5 basis points.
The central bank also injected 2 billion yuan through seven-day reverse repos while cutting the cost of borrowing at the same margin by 10 bps to 2.0 percent from 2.1 percent, according to an online statement.
The PBOC cut both rates by 10 bps in January.
($1 = 6.7425 Chinese Yuan)
Sign up now for FREE, unlimited access to Reuters.com
Sign up
Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill and Neil Fullick
Our standards: the Thomson Reuters Trust Principles.