Breaking News! What are the Signals from China’s Surprise Rate Cut besides the Aim of Lowering Financing Cost for Real Economy?

The People’s Bank of China (PBOC) conducted a seven-day reverse repurchase of 2 billion yuan and lowered the rate by 10 basis points to 1.9% on June 13, the first reduction in the rate since August 2022.  Experts said that the unexpected move by the PBOC is aimed at improving financing and supporting the development of the real economy.

The move signals that China will strengthen counter-cyclical adjustment and stabilise market.

"If the medium-term lending facility (MLF) winning bid rate on June 15 continues to decline, it will help further reduce banks' funding costs." Dong Ximiao, chief researcher of Merchants Union Consumer Finance Co., said that China's economy is in the recovery stage after the impact of the Covid-19 pandemic. The rate cuts not only reflects the supply and demand of the capital market, but also sends a signal that China will strengthen counter-cyclical adjustment and stabilize market expectations, which means a prudent monetary policy.

The PBOC announced a cut of 10 basis points in the rates of medium-term lending facility operations and open market reverse repurchase operations on August 15, 2022.

On August 22 of the same year, the 1-year LPR and the 5-year-plus LPR were lowered by 5 and 15 basis points respectively.

Some market participants also predict that the MLF rate and LPR this month may be adjusted, which will further reduce the financing cost of the real economy and help stimulate effective financing demand.

The cuts in policy interest rates will effectively boost market confidence and further strengthen the macroeconomic recovery in the second half of the year.

Yi Gang, Governor of the PBOC, said during a survey in Shanghai a few days ago that going forward, the bank will continue to implement a prudent monetary policy accurately and forcefully, strengthen counter-cyclical adjustments, fully support the real economy, promote full employment, and maintain currency stability and financial stability.

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