China cuts short-term funding rate for first time since 2015

China cuts short-term funding rate for first time since 2015

China’s central bank unexpectedly trimmed a closely watched lending rate on Monday, the first such cut in more than four years and a signal to markets that policymakers are ready to act to prop up slowing growth, Trend with reference to Reuters reports.

The People’s Bank of China (PBOC) said on its website that it was lowering the seven-day reverse repurchase rate to 2.50% from 2.55%.

The move cheered China’s bond market and comes just two weeks after the PBOC cut the borrowing cost on its medium-term lending facility (MLF), used by banks for longer-dated funding needs, by the same margin.

Both cuts raise the likelihood that the PBOC will trim its new benchmark loan prime rate (LPR), off of which many lenders base their mortgage rates, this week in a bid to free up funds to credit-starved parts of the economy.

Analysts say the unexpected cut on Monday also shows the central bank is keen to ease investor worries that higher retail inflation would prevent it from delivering fresh stimulus.

Zhou Hao, economist at Commerzbank in Singapore said the reverse repo rate cut indicates a policy change in coming months, including “some fine-tuning to prioritize the pro-growth policy for the time being.”

Growth in the world’s second-largest economy has eased to its slowest in nearly three decades and recent data such as credit growth and industrial output have continued to show a cooling economy.

Driven by soaring pork prices due to the spread of African Swine Fever, China’s consumer inflation rose past the government’s target of around 3% in October to its fastest pace in almost eight years.

That had raised some concerns the PBOC may be constrained in its efforts to ease policy. In a report released Saturday, the PBOC said it would maintain prudent monetary policy to prevent inflation from spreading.

However, market participants believe the two recent market rate cuts suggest a similar adjustment in the LPR this week.

Yan Se, chief economist at Founder Securities in Beijing, said the reverse repo rate cut showed authorities were open to using open market operations, typically used to meet the financial system’s daily funding needs, to stimulate longer term growth in the real economy.

“Commercial banks comprehensively evaluate financing costs to decide the LPR, so lowering reverse repo rates could maintain monetary policy stability,” Yan said.

“Against the backdrop of such a situation, a five basis point reduction in LPR is a high probability event.” A cut to banks’ reserve requirement ratio (RRR) is also possible, he added.

Similarly, Commerzbank’s Zhou expects a targeted RRR cut before the end of this year.

The PBOC announce its monthly LPR fixing on Wednesday. The rate on the one-year fixing now stands at 4.2% while the five-year is at 4.85%.

Monday’s repo rate cut bolstered the bond market, with China’s benchmark 10-year treasury futures for December delivery gaining more than 0.4% in the morning session.

Julian Evans-Pritchard, senior China economist at Capital Economics, said Monday’s reverse repo rate cut is a step to lowering marginal funding costs for banks, which rely heavily on repos as a source of short-term liquidity.

“With economic growth still slowing and unlikely to bottom out in the near-term, we think the PBOC will take further steps to shore up lending, which has weakened recently,” he said in a note, anticipating another 70-basis-point cut to the seven-day reverse repo rate by the middle of next year.

The PBOC had skipped reverse repo operations for 15 straight trading days before its injection of 180 billion yuan ($25.74 billion) into the interbank market on Monday.

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