China’s central bank unexpectedly reduced its key policy interest rates to bolster an economy that’s facing fresh risks from a worsening property slump. The yuan and bond yields slumped.
The People’s Bank of China lowered the rate on its one-year loans — or medium-term lending facility — by 15 basis points to 2.5% on Tuesday. All but one of the 15 analysts surveyed by Bloomberg had predicted the rate would stay unchanged.
The seven-day reverse repurchase rate, a short-term policy rate, was also cut by 10 basis points to 1.8%.
The move followed a 10-basis point cut to the MLF rate in June and a slew of disappointing economic data recently. Bank loans plunged to a 14-year low in July, while consumer and producer prices declined together for the first time since late 2020, a sign of deflation in the economy.
“The cut has been aggressive, indicating the urgency of stepping up measures to shore up credit growth,” said Becky Liu, head of China Macro Strategy from Standard Chartered Plc.
The PBOC’s surprise suggests heightened concern about the deteriorating outlook, especially in the real estate market, where another major property developer now faces a debt crisis and home sales continue to decline. Official figures to be released Tuesday are expected to show only moderate increases in industrial and retail activity in July, while contraction in property investment likely worsened.
The reduction in interest rates boosted government bonds and weighed on the exchange rate. China’s 10-year yield fell six basis points to 2.56%, the lowest since 2020. The offshore yuan weakened for the fourth session Tuesday, falling 0.21% to 7.2943 a dollar as of 9:27 a.m. in Shanghai.
The Chinese central bank’s easing action will add more pressure on the yuan, which fell to it weakest level since November as the economy’s growth outlook wanes. The PBOC has set its daily fixing for the currency at a stronger-than-expected level every day since late June. Top Communist party leaders vowed to keep the yuan in a “basically stable” range in a key meeting last month.
The PBOC also provided 401 billion yuan ($55 billion) of medium-term loans, slightly more than the 400 billion yuan maturing in August.
© 2023 Bloomberg
