China’s Central Bank Cuts Short-Term Lending Rate, Signaling More Monetary Policy Easing
The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90% on Tuesday, the first time it has lowered the rate since December 2021. The move is seen as a signal that the PBOC is willing to take further steps to support the economy, which has been hit by a number of headwinds in recent months, including the ongoing COVID-19 pandemic and the war in Ukraine.
The cut in the reverse repo rate is likely to be followed by reductions in other key interest rates, such as the medium-term lending facility (MLF) rate and the benchmark loan prime rate (LPR). The PBOC has already cut the MLF rate twice this year, and it is widely expected to cut the rate again at its next meeting on June 15. The LPR is set by a committee of banks and is based on the MLF rate, so a cut in the MLF rate is likely to lead to a cut in the LPR as well.
The PBOC’s move to cut interest rates is a sign that it is concerned about the slowdown in the Chinese economy. The economy grew at its slowest pace in a year in the first quarter of 2023, and there are concerns that it could slow further in the second quarter. The PBOC is likely to continue to take steps to support the economy, such as cutting interest rates and injecting liquidity into the financial system.
The weaker yuan is likely to put further pressure on the Chinese economy. A weaker currency makes imports more expensive, which could lead to higher inflation. It could also make it more difficult for Chinese companies to export their goods.
The PBOC’s decision to cut interest rates is a sign that the central bank is willing to take steps to support the economy. However, it is unclear whether the cuts will be enough to prevent the economy from slowing further.