SHANGHAI: The People’s Bank of China (PBoC) has cut a key short-term policy rate for the first time in almost a year, stepping up support for the economy after growth disappointed and steering a shift towards a new policy benchmark.
The seven-day reverse repo rate was lowered by 10 basis points to 1.7%, the PBoC said in a statement yesterday.
This aims to optimise the open market operation mechanism and increase financial support for the economy, it added.
Chinese banks followed the move about an hour later by lowering their main benchmark lending rate, or the loan prime rate (LPR), by 10 basis points each.
The cuts came after data showed economic growth slowed in the second quarter to the worst pace in more than a year as consumer spending faltered.
It also came on the heels of a twice-a-decade Communist Party conclave, which signalled little change to the long-term blueprint for the world’s second-largest economy with a continued focus on technology and manufacturing.
“The PBoC didn’t wait till the US Federal Reserve (Fed) cut first. This reflects that it probably recognises the downward pressure on China’s economy, so it needs to take action to address the challenge domestically,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.
The seven-day rate is seen as the future benchmark policy rate.
The PBoC in recent weeks signalled a shift towards the short-term rate to guide markets, which could make it operate more like other major central banks such as the Fed.
This will reduce the importance of the existing one-year benchmark – the medium-term lending facility (MLF) rate.
The LPR has been quoted by banks as a spread over the MLF rate, and yesterday’s volley of cuts could signal a weakened link between the two going forward.
The impact of the rate cut is likely to be limited as the modest reduction won’t be enough to stimulate households’ and businesses’ borrowing appetite significantly, economists said.
Some analysts, including Zhang, pointed to the need for stronger financial stimulus as government spending and debt issuance have remained weak this year.
“It’s a good sign that the government is trying to support the economy, though the fundamental impact is likely to be limited,” said Vey-Sern Ling, a managing director at Union Bancaire Privee, adding that a 10-basis-point cut is too small to boost loan demand.
China has also been stuck in the longest streak of deflation since 1999, with economy-wide prices dropping for five straight quarters.
That means real interest rates, which are adjusted for changes in prices, have stayed elevated, weakening the impact of any moderate easing.
Expectations are rising for additional monetary easing in the coming months, including further rate cuts and a reduction to the reserve requirement ratio (RRR), which refers to the amount of cash banks must set in reserve.
August and September are seen as a potential window, as a large amount of one-year policy loans will mature and could be replaced by the liquidity unleashed by an RRR cut.
After the announcement, China’s 10-year government bond yield slipped two basis points to 2.24%, while the offshore yuan edged lower.
Traders will be on watch for any potential moves from the PBoC in the bond market after the central bank pledged to borrow and sell sovereign notes if yields continue to decline.
A Bloomberg survey had suggested 2.25% was a red line for the PBoC for the 10-year yield, which hit a record low 2.18% earlier this month.
The PBoC last lowered the seven-day rate by 10 basis points in August, along with cutting the MLF rate. Since then, currency depreciation pressure has constrained the central bank’s room to lower interest rates. The one-year LPR was also last trimmed in August.
The move is likely to add pressure on the yuan as the Fed has yet to begin its rate cut path, which is expected to take place in September.
The PBoC will likely have to roll out measures to support the yuan exchange rate, as the rate cut is not expected by the market, according to Serena Zhou, senior China economist at Mizuho Securities Asia Ltd. — Bloomberg
