China’s central bank took the significant step of lowering its short-term lending rate for the first time in 10 months, aiming to restore market confidence and bolster the post-pandemic recovery of the world’s second-largest economy.
Kabul24: The People’s Bank of China (PBOC) reduced its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00%. This move suggests a potential easing of longer-term rates in the coming weeks as demand weakens and investor sentiment falters. Urgent policy stimulus is being considered as a means to sustain growth in China’s economy.
Concerns over Recovery Prompt Policy Action and Market Expectations
The rate cut decision by the central bank was not entirely unexpected, given the recent reduction in deposit rates by commercial banks and PBOC governor Yi Gang’s remarks on strengthening counter-cyclical adjustments.
The yuan dipped to a six-month low against the dollar following the rate decision, and yields on China’s benchmark 10-year government bonds reached a fresh 7-1/2-month low. Analysts believe that the PBOC’s move was aimed at mitigating the potential impact of future policy easing on the Chinese yuan, particularly in light of the Federal Reserve’s policy meeting, which is being closely monitored by financial markets.
China’s central bank remains distinctive among global counterparts as it adopts a loosening monetary policy to bolster growth, in contrast to major peers raising interest rates to address rising consumer prices.
However, further interest rate cuts in China could widen the yield gap with the United States, resulting in a depreciating yuan and accelerated capital outflows. As China prepares to release key economic indicators, including credit lending data and activity indicators such as retail sales and industrial production, the rate cut signals growing concerns among policymakers about the health of the country’s recovery
