China cuts policy loan rates, analysts signal further easing to come

SHANGHAI: China’s central bank on Monday unexpectedly cut borrowing costs for its medium-term loans for the first time since April 2020, as some market analysts expect further policy easing this year to cushion a economic downturn.

The People’s Bank of China (PBOC) announced that it is lowering the interest rate on 700 billion yuan ($110.19 billion) of one-year medium-term loans (MLF) to certain financial institutions by 10 basis points at 2.85%. 2.95 percent in previous operations.

Thirty-four of 48 traders and analysts, or 70% of all participants, polled by Reuters last week expected no change in MLF rates in January, with the rest betting on a rate cut.

The world’s second-largest economy has shown signs of slowing after a rapid rebound from the COVID-19 crisis, with concerns over the financial health of property developers and the rapid spread of the Omicron variant of the coronavirus clouding the outlook.

“The PBOC’s decision to ease in early January suggested that downward economic pressure intensified at the end of 2021 and that the room for improvement in the first quarter of this year is not huge,” he said. said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

Cheung expects the PBOC to come up with more easing measures this year than expected by market analysts.

These expectations were also reflected in the bond market, with China’s 10-year Treasury futures reaching their highest level since June 2020 and the yield on China’s benchmark 10-year government bonds falling by more than 2 points. basis at the beginning of the exchanges.

Market analysts said the size of the rate cut and the timing came as a big surprise, and they think further monetary stimulus could follow.

“The 1-year LPR signaled that another rate cut was imminent,” said Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong.

“However, the 10 basis point decline was larger than expected, suggesting that authorities have become more concerned about the weakness in the economy,” he said, adding that he expects also to a further reduction of 100 basis points in the reserve requirement ratio (RRR) of banks this year. .

With 500 billion yuan of MLF loans maturing on Monday, the operation resulted in a net injection of 200 billion yuan into the banking system.

The central bank also cut borrowing costs for seven-day reverse repurchase agreements, or repos, by the same margin to 2.10% from 2.20%, when it offered 100 billion yuan. additional repos in the banking system.

(1 USD = 6.3524 Chinese Yuan)

(Reporting by Winni Zhou and Andrew Galbraith; Editing by Christian Schmollinger and Ana Nicolaci da Costa)

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