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People’s Bank of China cuts interest rate on policy loans, first slash since April 2020

China lowered a key interest rate for the first time since the peak of the pandemic in 2020 as a property-market slump and repeated virus outbreaks dampened the nation’s growth outlook. Bonds rallied.

The People’s Bank of China cut the rate on its one-year policy loans by 10 basis points to 2.85%,  the first reduction since April 2020. It also cut the rate on the seven-day reverse repurchase rate and net injected 200 billion yuan ($31.5 billion) of medium-term cash into the financial system.

“The PBOC has accelerated its pace of policy easing in order to guide borrowing costs lower and to encourage credit supply,” said Yewei Yang, an analyst at Guosheng Securities Co. “The move suggests China’s economy is weak and it will trigger a significant slide in borrowing costs.”

Monday’s move puts China further apart from global central banks such as the Federal Reserve, which are seeking to normalize monetary policies to contain a surge in inflation. It backs up a pledge by policymakers last month that they will act to support the economy after months of deleveraging led to a housing slump.

All but three of the 10 economists surveyed by Bloomberg had forecast the rate on the one-year MLF remaining unchanged. Eight expected a full rollover of the policy loans.

The 10-year government yield fell two basis points to 2.78%. The overnight repo rate, a gauge of short-term interbank funding costs, fell six basis points.

Traders have been betting that the PBOC could ease further after it cut the reserve ratio for banks, while lenders lowered their loan prime rate last month.

“Today’s cut indicates that banks would cut the loan prime rate, the benchmark lending rates, for the second straight month,” said Hao Zhou, an emerging market economist at Commerzbank AG. “Chinese authorities are inclined to provide more counter-cyclical support to hedge against the strong economic headwinds particularly as the Omicron risks are looming on the horizon.”

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Source: The Print

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