China’s central bank, the People’s Bank of China (PBOC), has undertaken its second rate cut within three months to bolster economic recovery. The PBOC has reduced the rate on 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans to select financial institutions by 15 basis points, settling at 2.50% from the previous 2.65%. This strategic rate cut is part of China’s efforts to stimulate economic growth by intensifying monetary easing, as reported by Reuters. Back in June, the PBOC had already lowered key policy rates to support the broader economy.
In tandem with this rate cut, the PBOC also infused 204 billion yuan through seven-day reverse repos and trimmed borrowing costs by 10 basis points to 1.80% from the previous 1.90%, according to Reuters. This monetary move was aimed at counteracting factors such as tax payments to maintain reasonably ample liquidity within the banking system, as mentioned in an online statement by the PBOC.
The one-year medium-term lending facility (MLF) rate acts as a reference for China’s lending benchmark loan prime rate (LPR). Markets commonly view the medium-term policy rate as a precursor to any adjustments in the lending benchmarks. The upcoming monthly fixing of the LPR is scheduled for the following Monday.
China’s central bank’s decision to reduce rates and adopt a looser monetary policy arrives amid the policy tightening cycles of major global central banks aiming to curb high inflation.
The recent rate cut by China’s central bank has broadened the yield gap between China and other major economies. Consequently, this has led to pressure on the yuan due to potential capital outflows. The Chinese yuan has depreciated 5% against the dollar this year, ranking it among the weakest performing Asian currencies. As of 0145 GMT, the yuan traded at 7.2842 per dollar, compared to the previous close of 7.2580, as reported by Reuters.
Meanwhile, yields on China’s 10-year government bonds have eased to 2.56%, reaching the lowest level since May 2020.
