Economy
China cuts short-term borrowing costs to support recovery
China’s central bank lowered a short-term lending rate for the first time in 10 months on Tuesday, to help restore market confidence and prop up a stalling post-pandemic recovery in the world’s second-largest economy.
The cut to the lending rate signals possible easing for longer-term rates over the next week and beyond as demand and investor sentiment weaken, adding to the case for urgent policy stimulus to sustain growth.
The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.
“The central bank’s rate cut decision was not a complete surprise to the market,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“Commercial banks have already lowered deposit rates, and PBOC governor Yi Gang also mentioned strengthening counter-cyclical adjustment recently.”
The yuan hit a six-month low of 7.1680 per dollar after the rate decision while yields on China’s benchmark 10-year government bonds fell to a fresh 7-1/2-month low.
Cheung said the PBOC may have wanted to mitigate the impact of any future policy easing on the Chinese yuan ahead of the Federal Reserve’s policy meeting this week, which is keenly watched by financial markets.
China remains an outlier among global central banks as it loosens monetary policy to shore up growth while its major peers raise interest rates to counter surging consumer prices.
Further interest rate cuts in China would only widen the yield gap with the United States, even if the Fed pauses this week, sending the yuan lower and accelerating capital outflows.
China is due to release May credit lending data and activity indicators, including retail sales and industrial production, this week.
Tuesday’s rate cut suggests policymakers are increasingly worried about the health of China’s recovery, traders and analysts said.
“This reminds the market of the challenges that the Chinese economy faces during its recovery period,” said Marco Sun, chief financial market analyst at MUFG Bank (China).
“However, the market is expecting the PBOC to cut the policy rate further. Looking ahead, the PBOC could make marginal adjustments to the policy rate in order to stimulate credit growth and avoid inflation issues in the coming quarters.”
Bloomberg reported on Tuesday, citing unnamed sources, that China was considering at least a dozen stimulus measures including cuts to interest rates to support areas such as real estate and domestic demand.
The next adjustment to rates could come as soon as Thursday, when the central bank is due to roll over 200 billion yuan ($27.93 billion) in medium-term lending facility (MLF) loans.
“The 10 bp cut in the open market operations (OMO) reverse repo rate can be seen as a precursor to an MLF rate cut this Thursday,” said Frances Cheung, rates strategist at OCBC Bank.
“Rates may continue to trade on the soft side but given much economic pessimism and a rate cut are already in the price, we see limited downside to rates from here.”
Separately, markets expect the benchmark lending loan prime rate (LPR), which is used to set consumer loan and mortgage rates, could be lowered by the same margin at the monthly fixing next Tuesday.
And some investment banks expect a 25 bp reduction to the reserve requirement ratio, or amount of cash banks must set aside as reserves, this year.
“There could be less urgency to cut the RRR after these policy interest rate cuts … we now think the 25 bp RRR cut that we had previously forecast for June is likely to be delivered in Q3 instead,” Goldman Sachs economists said in a note.
“There could be another RRR or policy interest rate cut in Q4, depending on the economic outcome over the next several months.”
($1 = 7.1610 Chinese yuan)
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
© Reuters. FILE PHOTO: Workers walk past an under-construction area with completed office towers in the background, in Shenzhen’s Qianhai new district, Guangdong province, China August 25, 2023. REUTERS/David Kirton/File Photo
SHANGHAI (Reuters) – China’s top planning body said on Saturday it had identified a second batch of public investment projects, including flood control and disaster relief programmes, under a bond issuance and investment plan announced in October to boost the economy.
With the latest tranche, China has now earmarked more than 800 billion yuan of its 1 trillion yuan ($140 billion) in additional government bond issuance in the fourth quarter, as it focuses on fiscal steps to shore up the flagging economy.
The National Development and Reform Commission (NDRC) said in a statement on Saturday it had identified 9,600 projects with planned investment of more than 560 billion yuan.
China’s economy, the world’s second largest, is struggling to regain its footing post-COVID-19 as policymakers grapple with tepid consumer demand, weak exports, falling foreign investment and a deepening real estate crisis.
The 1 trillion yuan in additional bond issuance will widen China’s 2023 budget deficit ratio to around 3.8 percent from 3 percent, the state-run Xinhua news agency has said.
“Construction of the projects will improve China’s flood control system, emergency response mechanism and disaster relief capabilities, and better protect people’s lives and property, so it is very significant,” the NDRC said.
The agency said it will coordinate with other government bodies to make sure that funds are allocated speedily for investment and that high standards of quality are maintained in project construction.
($1 = 7.1315 renminbi)
© Reuters. Russian Central Bank Governor Elvira Nabiullina attends a news conference in Moscow, Russia June 14, 2019. REUTERS/Shamil Zhumatov/File Photo
MOSCOW (Reuters) – Russia’s central bank will need two to three months to make sure that inflation is steadily declining before taking any decision on interest rate cuts, the bank’s governor Elvira Nabiullina told RBC media on Sunday.
The central bank raised its key interest rate by 100 basis points to 16% earlier in December, hiking for the fifth consecutive meeting in response to stubborn inflation, and suggested that its tightening cycle was nearly over.
Nabiullina said it was not yet clear when exactly the regulator would start cutting rates, however.
“We really need to make sure that inflation is steadily decreasing, that these are not one-off factors that can affect the rate of price growth in a particular month,” she said.
Nabiullina said the bank was taking into account a wide range of indicators but primarily those that “characterize the stability of inflation”.
“This will take two or three months or more – it depends on how much the wide range of indicators that characterize sustainable inflation declines,” she said.
The bank will next convene to set its benchmark rate on Feb. 16.
The governor also said the bank should have started monetary policy tightening earlier than in July, when it embarked on the rate-hiking cycle.
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