China’s Central Bank Cuts Key Interest Rate Amid Disappointing Economic Data

The People’s Bank of China (PBOC) has cut its seven-day reverse repurchase rate, a key short-term policy rate, as the country faces disappointing economic data after a Covid-19 reopening that failed to gain momentum. This is the first such move by the central bank since August and follows the country’s largest banks cutting deposit rates last week, indicating that further monetary easing is likely.

The Rate Cut

The PBOC has cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9%, according to a central bank release. The bank has injected 2 billion Chinese yuan ($279.97 million) through its seven-day repos. A repurchase agreement (repo) is a type of short-term borrowing rate.

Expectations and Predictions

The PBOC’s medium-lending facility interest rate decision is expected to be released on Thursday, while the bank’s loan prime rate is scheduled for release on June 20. The onshore Chinese yuan weakened 0.25% to 7.1618 against the U.S. dollar shortly after the move on Tuesday and hovered at its weakest levels since November.

UBS Global Wealth Management predicts that further policy easing is on the horizon, stating in its June outlook report that “we believe monetary policy will continue to focus on keeping liquidity ample and credit growth steady.” It predicts the central bank will deliver one to two “modest” reserve requirement ratio cuts or cuts in the medium-lending facility rate by 5 to 10 basis points in the second half of this year.

Yang Liu, Atlantis’ Chief Investment Officer, told CNBC’s “Street Signs Asia” that “now we are going to see the Chinese [monetary] policy will become more supportive,” adding that “basically what the Chinese government is [expected] to do [is] to try very hard to prop up the domestic consumption, especially in the private sector.”

Impact on FX Pressure and Demand Stimulus

UBS Global Wealth Management warns that larger steps in monetary policy could worsen FX pressure, which policymakers want to avoid, and come with diminishing returns if not accompanied by demand stimulus.

The PBOC’s rate cut is a response to disappointing economic data in China following the Covid-19 reopening. This move is the first by the central bank since August and is expected to be followed by further monetary easing in the near future. While the move may prop up domestic consumption, larger steps in monetary policy could worsen FX pressure and require demand stimulus.