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China's Central Bank Cuts Short-Term Policy Rate to Boost Economy
Posted on August 8, 2024 |
China shocked investors by lowering key short- and long-term interest rates, which was a significant move and its first since August of last year (2023). This move indicates a desire to accelerate economic growth in the second-biggest economy in the world.
The benchmark bank lending rates, market operations rates, and the central bank's primary short-term policy rate are all impacted by the changes. This action comes after a leadership plenum that occurs typically every five years and second-quarter economic statistics that were lower than anticipated.
In addition to a protracted property crisis, skyrocketing debt, and a lacklustre outlook from consumers and businesses, China is on the verge of deflation. Tensions over trade are also rising as world leaders show less faith in China's export superiority.
According to Macquarie's senior China economist, Larry Hu, the reduction was an unanticipated action that was probably prompted by the second quarter's dramatic deceleration in growth momentum and the leadership's insistence on meeting this year's growth objective.
The People's Bank of China (PBOC) declared on Monday that it would enhance open market operations and lower the seven-day reverse repo rate from 1.8% to 1.7%. The rate has not been lowered since August 2023.
Soon after, during the monthly fixing, China lowered benchmark lending rates by the same amount. Loan prime rates (LPRs) for one year were cut from 3.45% to 3.35%, and for five years, they were cut from 3.95% to 3.85%.
Further, the PBOC cut rates by the same amount on its standing lending facility (SLF), a kind of credit that is provided to commercial banks to satisfy short-term cash needs.
Ju Wang, head of BNP Paribas' Greater China FX & rates strategy, pointed out that the PBOC had leeway to loosen policy given mounting expectations that the Federal Reserve would begin reducing interest rates. This was especially true given the pressure the yuan was under from a widening yield gap with the dollar.
Citing anonymous sources close to the People's Bank of China, the official Xinhua news agency said that the "decisive" rate drop showed the bank's commitment to supporting the recovery and addressed the plenum's goals of meeting this year's growth objective.
The medium-term lending facility loans' collateral requirements would be cut starting in July, according to PBOC announcements about changes to its lending program.
According to analysts, this move will free up banks to sell or trade more because they won't need to keep as many longer-term bonds as collateral. By taking this action, the central bank is advancing its goals of raising the yield curve, preventing a bond bubble, and stabilising longer-term yields.