China Cuts One-Year Policy Rate by Most Ever in Stimulus Drive
(Bloomberg) -- China’s central bank lowered the interest rate charged on its one-year policy loans by the most on record, kicking off a sweeping program to revive confidence in the world’s second-largest economy.
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The People’s Bank of China cut the rate of the medium-term lending facility to 2% from 2.3%, according to a statement on Wednesday. The 30-basis-point cut was the biggest since the bank began using the monetary tool to guide market interest rates in 2016.
The expected move followed Governor Pan Gongsheng’s announcement the previous day of a broad stimulus package that amounted to an adrenaline shot for an economy on the cusp of a deflationary spiral.
“The cut is part of the package,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “The market is keeping a close eye on the strength, frequency and synergy of measures to follow as China strives to achieve this year’s around 5% growth goal.”
The yuan rallied past the 7 per dollar milestone for the first time in 16 months as investors digested China’s stimulus package. Chinese stocks extended their gains, with the onshore benchmark CSI 300 Index on track to wipe out all of its losses for 2024. The yield on China’s 10-year bonds fell 1 basis point to 2.05%.
The cut to the MLF rate is a prelude to more significant measures such as a promised reduction in the rate on seven-day reverse repurchase notes, which the PBOC increasingly favors as the main policy lever. The rate on those instruments will be lowered by 20 basis points to 1.5% “soon,” Pan said Tuesday.
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“Looking ahead, we see room for the PBOC to do more on the rates front than Pan has signaled so far. There’s a chance the central bank could trim the seven-day reverse repo rate by a further 10 bps on top of the move Pan flagged on Tuesday.”
David Qu, economist
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Reflecting the new framework, the monetary authority withdrew a net 291 billion yuan ($41.4 billion) via the MLF, the biggest drainage since December 2021.
The outstanding MLF loans are widely expected to be gradually replaced by other tools, including cash injections through reserve requirement ratio cuts, as the PBOC seeks to influence market borrowing costs more effectively.