China cuts key policy rate to support economy after weak trade and inflation data, with ‘wider easing’ to follow
- The People’s Bank of China cut the seven-day reverse repo from 2 to 1.9 per cent on Tuesday when it sold 2 billion yuan (US$280 million) of the liquidity tool
- The move came as the market has joined calls for more policy easing following weak trade and inflation figures
China’s central bank cut a key policy rate on Tuesday in a clear signal of monetary loosening to support the struggling national economy, a move which could trigger “wider easing”, analysts said.
The seven-day reverse repo rate, a widely used liquidity injection tool, was cut from 2 to 1.9 per cent when the People’s Bank of China (PBOC) sold 2 billion yuan (US$280 million) worth of the tool.
This is clearly a loosening signal
Leading investment banks, such as Citic Securities, said earlier that China had entered a window of economic stabilisation, and were expecting policy rate cuts to bolster the post-coronavirus recovery.
“This is clearly a loosening signal,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
Ding expects subsequent cuts of the medium-term lending facility (MLF) and also the loan prime rate, which is partly linked to mortgage loans.
“Those moves are set to turn around [pessimistic] market expectations,” he added.
Around 200 billion yuan worth of MLF will also mature on Thursday, marking the next window for Beijing to offer support to the economy.
Later on Tuesday, the central bank said new bank loans picked up in May from the previous month as lending rose to 1.36 trillion yuan (US$190 billion) last month from 718.8 billion yuan in April and 1.89 trillion yuan a year earlier.
The National Bureau of Statistics is set to publish industrial output, investment, retail sales and unemployment data on Thursday.
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“China has strong economic resilience, big [growth] potential and ample policy space,” he said.
“[We] should have confidence and patience for China’s steady economic growth.”
It suggests that a desire to support economic growth is now taking precedence over concerns about bank profitability
Yi said the central bank would enhance countercyclical adjustments and use a variety of monetary tools to maintain reasonably ample liquidity and appropriate credit supply. They are also striving to lower the borrowing costs of market entities, he added.
“The PBOC has lowered its short-term policy rate for the first time since last summer, revealing growing concerns among policymakers about the health of China’s recovery,” said economists at Capital Economics.
“It is likely to be followed by wider easing across the PBOC’s other tools. But we think that a sharp acceleration in credit growth is still unlikely, and that the recovery will continue to mostly depend on the service sector.
“No official explanation was given for [Tuesday’s] policy change. But it suggests that a desire to support economic growth is now taking precedence over concerns about bank profitability.”
