SHANGHAI: China surprised markets by lowering a key short-term policy rate and its benchmark lending rates on Monday, in efforts to boost growth in the world’s second-largest economy.
The cuts come after China reported weaker-than-expected second-quarter economic data last week and its top leaders met for a plenum that occurs roughly every five years.
The country is verging on deflation and faces a prolonged property crisis, surging debt and weak consumer and business sentiment.
Trade tensions are also flaring, as global leaders grow increasingly wary of China’s export dominance.
“The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for ‘achieving this year’s growth target’ by the third plenum,” said Larry Hu, chief China economist at Macquarie.
The People’s Bank of China (PBOC) said on Monday it would cut the seven-day reverse repo rate to 1.7% from 1.8%, and would also improve the mechanism of open market operations.
Minutes later, China cut benchmark lending rates by the same margin at the monthly fixing.
The one-year loan prime rate (LPR) was lowered to 3.35% from 3.45% previously, while the five-year LPR was reduced to 3.85% from 3.95%.
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Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said that growing expectations for the Federal Reserve to start cutting interest rates also gave the PBOC room to ease its policy, given the pressure the yuan has been under because of a wide yield gap with the dollar.
The official Xinhua news agency cited unnamed sources close to the PBOC as saying the “decisive” rate cut showed its determination to bolster the recovery and it was in response to the plenum’s aims to achieve this year’s growth target.
The PBOC also made adjustments to its lending programme, saying collateral requirements for its medium-term lending facility loans will be lowered from July.
That, analysts said, means banks would need to hold less longer-term bonds for collateral needs and could sell or trade more, helping the central bank with its mission to put a floor under longer-term yields, rein in a bubble in bonds and get a steeper yield curve.