China cuts its short-term policy rate for the first time since August

China’s central bank unexpectedly cut its short-term interest rate, as a move to ease its monetary policy to help the economy recover.

The People’s Bank of China cut the 7-day reverse repo rate by 10 basis points to 1.9%, according to a statement on Tuesday. This was the first rate cut since August 2022.

Official data to be released on Thursday is expected to show that the economy’s recovery lost further momentum in May, with weak manufacturing and investment data. It comes as consumer spending has begun to moderate, which picked up early this year after China eased restrictions imposed during the pandemic.

“Policy makers are finally acknowledging the economic weakness,” said Michelle Lamm, Greater China economist at Societe Generale SA. “There should be further cuts in interest rate and reserve requirement ratio in the second half of 2023.”

Tuesday’s rate cut comes ahead of the US Federal Reserve’s monetary policy decision later this week, when economists anticipate a possible pause.

The external yuan extended its losses, falling 0.3% to 7.1748 per dollar, after the interest rate cut. The yield on 10-year government bonds fell three basis points to 2.64%.

Real estate stocks rose after the decline, with the developers’ stock index rising by 2.2%. While the broader market indices for China and Hong Kong were volatile.

Speculation has been rising recently that the People’s Bank of China (PBOC) will cut interest rates, although it is unusual for the short-term interest rate to be adjusted ahead of the one-year policy rate, otherwise known as the Medium-term Lending Facility (MLF).

That rate will be released on Thursday, with seven of the 16 economists surveyed by Bloomberg expecting a decline. The last time the 7-day rate was adjusted before the “MLF” rate was in March 2020.

People’s Bank of China Governor Yi Gang last week pledged to intensify “counter-cyclical adjustments”, a shift in language that some analysts said indicated further easing. He also pledged to “make every effort to support the real economy” as the recovery in demand has lagged behind supply.

Senior China strategist at Australia and New Zealand Banking Group Ltd., Zheng Zhaoping, said the Fed’s decision as well as upcoming credit data may affect the timing of the PBOC’s rate cut.

He added that “May’s credit data, which may be issued today or tomorrow, may be very bad.” “The People’s Bank of China may be concerned about potential shocks in the market so it took this opportunity to try to calm concerns in advance.”

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