PBOC cut two short-term policy rates to prop up economic recovery, intensifying hopes for LPR cut

 

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The People’s Bank of China (PBOC) cut the interest rates on two monetary policy tools, intensifying market expectation that the benchmark lending rate will be lower later this month, as the country’s economic recovery has been losing momentum in the recent two months.

The PBOC injected 2 billion yuan liquidity to the banking system via 7-day reverse repurchase agreement on Tuesday, at an interest rate of 1.9%, which drops by 10 basis points from a rate of 2% in the previous reverse repo operation, marking the first cut of rate in ten months.

Later on the day, the central bank cut the interest rates on Standing Lending Facility (SLF) by 10 basis points, with the rate on overnight SLF cut to 2.75%, 7-day SLF cut to 2.9% and one-month SLF cut to 3.25%.

Tuesday’s rate cut suggests policymakers are increasingly worried about the health of China’s recovery, traders and analysts said.

The PBOC’s move to cut the rate for its open market operation (OMO) indicates the real economy’s financing demand may be weaker than expected, Industrial Securities said in a note on Tuesday.

There is a big chance for the interest rate on Medium-Term Lending Facility (MLF) which will likely be renewed on Thursday and the benchmark lending rate Loan Prime Rate (LPR) to be lowered and the cut in LPR will likely be bigger than 10 basis points, it said.

China is due to release some key economic data from May, including industrial production, retail sales and investment, this week.

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.