China Surprisingly Cuts Policy Interest Rates Again to Boost Economy

TMTPost -- China’s central bank is taking further steps to boost economy with more unexpected policy interest rate cuts.

Credit：Xinhua News Agency

The People's Bank of China (PBoC) announced Thursday it pumped RMB200 billion (US$28.04 billion) into the market via the medium-term lending facility (MLF), which will mature in one year at an interest rate of 2.3%. The latest MLF interest rate was 20 basis points lower than the previous level, representing the first reduction in almost a year.

"Financial institutions have much more liquidity demand near the end of the month, adding to upward pressures on the interest rates of the monetary market," said Wen Bin, chief economist at China Minsheng Bank, in explaining the reason for the PBoC's additional MLF operation this month. These moves indicate that the central bank will maintain reasonable and sufficient liquidity to help consolidate economic recovery, Wen said.

The MLF tool was introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank using securities as collateral. Recent interest rate declines, especially those for corporate loans and mortgages, will help further reduce the burden on the real economy and stimulate effective demand, the official news agency Xinhua cited analysts.

The cut in the policy rates could reduce the cost of financing and release cash, said Marco Sun, chief financial market analyst at MUFG Bank (China). The unexpected MLF operation was also due to a large amount of MLF loans coming due, according to Sun. Some market analysts said Thursday's rate cut was also a reaction to major lenders' decision to lower deposit rates. Six state-backed banks including the Industrial and Commercial Bank of China (ICBC) reduced deposit rates by 5 to 20 basis points. PBoC wants to be more accommodating to banks in lowering their medium-term funding costs, and cutting the MLF rate at a larger scale can help shield the net interest margin, said Gary Ng, Asia Pacific senior economist at Natixis.

The cuts are “helpful but the impact of interest-rate cuts will likely be more muted given weak confidence and still entrenched expectations of house price decline,” said Michelle Lam, Greater China economist at Societe Generale SA. “That is still insufficient to turn around people’s weak expectations on jobs and income.”

The MLF rate cut came days after the central bank cut major policy rates. The interest rate on seven-day reverse repos, a key short-term policy rate, was lowered from 1.8% to 1.7% on Monday, the first cut to the rate since August, 2023. PBoC said it would improve the mechanism of open market operations. These are new efforts to strengthen counter-cyclical adjustments and better support the real economy.

The PBoC said Monday it slashed the interest rates on its standing lending facility (SLF) on Monday, aiming to improve the monetary policy transmission mechanism. The overnight rate was cut by 10 basis points to 2.55 percent, and the seven-day and one-month rates were each lowered by 10 basis points to 2.7 percent and 3.05 percent, respectively. The SLF, introduced in 2013, acts as a channel to meet the liquidity needs of financial institutions. These institutions can take out SLF loans from the central bank, using qualified bonds and other credit assets as collateral.

Monday also saw market-based benchmark lending rates at a monthly fixing were cut. The one-year loan prime rate (LPR), that most new and outstanding loans in China are based on, was 3.35 percent on Monday, down from the previous reading of 3.45%, and the five-year LPR, on which many lenders base their mortgage rates, was reduced by 10 basis points to 3.85%, according to the National Interbank Funding Center.