Main building of the People's Bank of China.
Zhang Peng | LightRocket | Getty Images
The Chinese central bank unexpectedly cut interest rates on Monday, the first such cut in more than four years, and signaled to markets that policymakers are ready to shore up slower growth.
The People's Bank of China (PBOC) announced on its website that the 7-day reverse repurchase rate has been reduced from 2.55% to 2.50%.
The move cheered China's bond market and came just two weeks after the PBOC cut its borrowing costs Medium Term Loan Facility (MLF), which is used by banks for longer term financing needs with the same margin.
Both cuts increase the likelihood that the PBOC lowers its new interest rate on loans (LPR) Many lenders are using their mortgage rates this week to lend funds to the lewd sections of the economy.
Analysts say the unexpected cut on Monday also shows that the central bank would like to relieve investors' worries about higher retail inflation would prevent it from providing new impetus.
Zhou Hao, economist at Commerzbank in Singapore, said lowering the reverse repo rate points to a change in policy in the coming months, including "some fine-tuning to prioritize growth policy for the time being". [1
Driven by rising pork prices due to the spread of Africa's swine fever, China's consumer inflation rose above the government's target from around 3% in October to the fastest pace in nearly eight years.
This raised some concerns that the PBOC may be limited in its efforts to ease policy. In a report released on Saturday, the PBOC announced its intention to maintain prudent monetary policy to prevent inflation from spreading.
However, market participants believe that the two recent market rate cuts suggest a similar adjustment of the LPR this week.
Yan Se Founder Securities chief economist in Beijing said lowering the reverse repo rate shows that the authorities are open to open market operations, which are usually used to cover the daily financing needs of the financial system, to ensure long-term growth to stimulate the real economy.
Commercial banks are fully evaluating the cost of financing to determine the LPR, so reducing reverse repo rates could maintain monetary stability, "Yan said.
" In light of such a situation, there is a reduction in LPR by five basis points a high probability event. "A reduction in banks' reserve requirement ratio (RRR) is also possible.
Similarly, Commerzbank's Zhou expects a targeted reduction in the RRR before the end of this year.
PBOC announces its monthly LPR fixing on Wednesday the one-year fixing is now at 4.2%, while the five-year rate is at 4.85%.
Monday's reduction in the repo rate supported the bond market, with China's 10-year Treasury futures for December delivery by more than 0.4% at the morning session.
Julian Evans-Pritchard, senior Chinese economist at Capital Economics, said lowering the reverse repo rate on Monday was a step towards lowering the marginal financing costs for banks that Liquidity is reliant heavily on repos as a short-term source.
"As economic growth slows down and it is unlikely that it will bottom out in the short term In our view, the PBOC will take further steps to shore up the recent weakening of lending. "Base point cut to seven-day reverse repo rate by mid-next year.
The PBOC had omitted the reverse repo business for 15 trading days in a row, before 180 billion yuan ($ 25.74 billion) went into the interbank market on Monday.