China Cuts Key Policy Rate In Surprise Move To Boost Slowing Economy

(RTTNews) - The People's Bank of China unexpectedly reduced its short-term borrowing rate on Tuesday and authorities are expected to add more stimulus in the days ahead by way of a cut to the benchmark lending rate as several economic indicators have revealed a sagging economy after the post-pandemic reopening turned out to be quite tepid.

The PBoC cut the seven-day reverse repo rate to 1.90 percent from 2.0 percent. This was the first lowering since a similar size reduction in August last year. The reverse repo is the rate at which the central bank gives short-term liquidity to banks. The latest reduction injected CNY 2 billion, or $279.97 million, through seven-day repos.

The central bank move, coupled with interest rate reductions by the country's big banks over the past few days, signal more monetary policy easing in the days ahead.

The PBoC is set to decide on the one-year medium-term lending facility rate on Thursday. Economists widely expect a similar size reduction to the MLF rate, which is currently at 2.75 percent. A similar cut is also expected for the one-year Loan Prime Rate, or LPR, when the bank announces its decision on the same on June 20. The rate is now 3.65 percent.

Official data released on Tuesday showed that bank lending grew less than expected to CNY 1.360 trillion, or $190.18 billion, in May. Economists had forecast CNY 1.600 trillion lending.

Capital Economics thinks that a sharp acceleration in credit growth is still unlikely and that the recovery will continue to mostly depend on the service sector.

"We had expected some further monetary support this quarter but thought that, in order to avoid putting pressure on interest margins at commercial banks, it would take the form of a required reserve ratio, or RRR, reduction rather than a rate cut," Capital Economics economist Julian Evans-Pritchard said.

The lack of official explanation for the latest policy change suggests that a desire to support economic growth is now taking precedence over concerns about bank profitability, the economist added. Evans-Pritchard said more forceful stimulus still looks unlikely and the near-term outlook will depend primarily on the extent of second-round effects on consumer confidence and spending from the ongoing tightening of the labor market.

The National Bureau of Statistics is set to release figures for retail sales and industrial production for May, along with the data on unemployment and fixed investment, also on Thursday. Consensus forecast shows a sharp slowing in the retail sales year-on-year growth to 13.7 percent from 18.4 percent. ING economist Robert Carnell reckoned it would translate into about a 1 percent month-on-month decline, adding that the apparent strength was all due to base comparisons.

"If the one engine of growth - retail sales - is not delivering what is required of it, and if the other sectors of the economy are failing to pick up the slack, then broader stimulus measures like these would seem appropriate," Carnell said. "Short of a substantial boost from fiscal policy, such as loans from the central government to local governments to spur infrastructure spending, that doesn't look on the cards just yet, though today's move does indicate that the authorities' patience with the weak recovery is wearing thin," the economist added.

Unlike in other big economies, where policymakers are battling high inflation, price growth have been weak in China. Latest official data showed that consumer price inflation increased in May but remained very low and factory gate prices declined the most in more than seven years.