China Central Banks To Adjust Lending Rates To Support Economic Recovery

On Tuesday, China's central bank cut a short-term lending rate for the first time in ten months to assist restore market confidence and support the world's second-largest economy's stalled post-pandemic recovery.

The lending rate drop suggests that longer-term rates may be lowered in the coming week and beyond as demand and market sentiment deteriorate, strengthening the case for immediate policy support to sustain growth.

The People's Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90 per cent from 2.00 per cent on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.

"The central bank's rate cut decision was not a complete surprise to the market," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

"Commercial banks have already reduced deposit rates, and PBOC governor Yi Gang recently mentioned bolstering counter-cyclical adjustment."

Following the rate announcement, the yuan sank to a six-month low of 7.1680 per dollar, while rates on China's benchmark 10-year government bonds plunged to a new seven-and-a-half-month low.

Cheung speculated that the PBOC may have tried to limit the impact of any future policy easing on the Chinese yuan ahead of the Federal Reserve's policy meeting this week, which financial markets are closely watching.

China continues to be an anomaly among global central banks, loosening monetary policy to support growth while its major peers boost interest rates to combat rising consumer costs.

Even if the Fed stops this week, more interest rate reduction in China will merely increase the yield gap with the US, sending the yuan lower and intensifying capital outflows.

This week, China will report May credit lending data as well as activity indicators such as retail sales and industrial production.