The People’s Bank of China (PBOC) building in Beijing on December 15, 2022.
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The PBOC cut its seven-day reverse repo rate by 10 basis points 2% to 1.9%, according to a report by the central bank, which injected 2 billion Chinese yuan ($279.97 million) through its seven-day repo operations.
AND repurchase agreement is a type of short-term borrowing interest rate.
It is the first such move by the central bank since August and follows the biggest national banks cut deposit rates last week, signaling that further monetary policy easing is in store.
The move comes ahead of the central bank’s decision on the interest rate of the credit facility, which is expected to be published on Thursday. Meanwhile, the bank’s key interest rate is scheduled to be published on June 20.
“Now let’s look at the Chinese [monetary] policy will become more supportive,” Atlantis chief investment officer Yang Liu told CNBC’s “Street Signs Asia.”
“Basically what the Chinese government is [expected] do [is] to try very hard to support domestic consumption, especially in the private sector,” she said.
UBS Global Wealth Management also expects further policy easing, it said in its June outlook report.
“We believe that monetary policy will continue to focus on maintaining sufficient liquidity and stable credit growth,” it said, predicting that the central bank will make one or two “moderate” reductions in minimum reserve requirements this year.
It also expects the Medium Lending Facility (MLF) rate to be cut by 5 to 10 basis points in the second half of this year.
“However, larger moves could exacerbate the foreign exchange pressure that policymakers want to avoid and lead to falling yields if not accompanied by a demand stimulus,” it said.
After this decision, the prices of Chinese government bonds rose. The yield on the nation’s 10-year Treasury note fell about 4 basis points to 2.645%, the lowest in nine months. Yields move inversely to prices and the basis point is equal to 0.01%.
The dollar rose to 7.1610 against the mainland Chinese Yuan shortly after the move on Tuesday — and was trading at its weakest levels since November.
The central bank’s decision to cut its seven-day reverse repo rate is seen as a “long overdue move” and hints at further easing in the future, Societe Generale economists Wei Yao and Michelle Lam said in a note on Tuesday.
The decision is “likely not enough to stabilize slowing growth,” the economists said, adding that it was “almost certain” that a mid-term lending rate cut would take place this week.
But monetary easing may not be enough to support weak demand, which is at the heart of China’s growth concerns. Weakening demand for housing is due to a “permanent loss of confidence”, economists noted.
“No amount of rate cuts will bring back that kind of demand,” they said, “much more easing is needed, especially fiscal easing supported by central [government] funding.”