Beijing June 13 2023: China’s central bank unexpectedly cut its short-term policy interest rate, easing its monetary stance to help aid the economy’s recovery.
The People’s Bank of China lowered the seven-day reverse repurchase rate by 10 basis points to 1.9%, according to a statement Tuesday. It was the first reduction in the rate since August 2022.
Official data to be released on Thursday is expected to show the economy’s recovery lost further momentum in May, with manufacturing and investment weakening. Consumer spending, which surged early this year after China dropped pandemic restrictions, is also starting to moderate.
“Policymakers are finally acknowledging the economic weakness,” said Michelle Lam, Greater China economist at Societe Generale SA. “There should be more interest rate and reserve requirement ratio cuts in the second half of 2023.”
Tuesday’s rate cut comes ahead of the Federal Reserve’s policy decision later this week, with economists expecting a likely pause.
The offshore yuan extended its loss, falling 0.3% to 7.1748 per dollar, after the rate cut. The yield on 10-year government bonds fell three basis points to 2.64%.
Property shares rallied after the cut, with a gauge of developers’ stocks climbing as much as 2.2%. Broader China and Hong Kong market indexes were volatile.
Speculation has grown recently that the PBOC would cut interest rates, although it’s unusual for the short-term rate to be adjusted before the rate on the one-year policy loans, known as the medium term lending facility.
That rate will be announced on Thursday, with seven of the 16 economists surveyed by Bloomberg forecasting a reduction. The last time the seven-day rate was adjusted before the MLF rate was in March 2020.
“The rate cut timing came a bit earlier than expected before the MLF yield roll-over day, suggesting that the PBOC may attempt to act ahead of the curve and Fed meeting to mitigate the rate cut impact on the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd. in Hong Kong.
PBOC Governor Yi Gang last week vowed to step up “counter-cyclical adjustments,” a shift in language that some analysts said signaled more easing. He also pledged to “make all efforts to support the real economy” as the recovery in demand has lagged that of supply.
Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. said the Fed’s decision as well as upcoming credit data could have affected the timing of the PBOC’s rate cut.
“The May credit data that may be released today or tomorrow could be very bad,” he said. “The PBOC may be worried about the potential shocks to the market and so it took this opportunity to try to appease concerns in advance.”
