China's central bank unexpectedly cuts key policy rates, boosting market expectations
Published: Aug 15, 2023 05:46 PM
A view of the PBC building in Beijing Photo: VCG

A view of the PBC building in Beijing Photo: VCG

China's central bank on Tuesday unexpectedly lowered key policy interest rates, in an effort to boost economic activities, as a range of economic data for July released on Tuesday reflected persistent challenges faced by the country during its economic recovery. 

The move by the People's Bank of China (PBC) was widely applauded, as market analysts said that "the two rate cuts in a day" underscored the country's determination to take necessary policy measures to ensure stable growth amid lingering downward pressure.

On Tuesday, the PBC reduced the rate on one-year loans, known as the medium-term lending facility (MLF), by 15 basis points to 2.5 percent. Meanwhile, the central bank also lowered the seven-day reverse repurchase rate, a short-term policy rate, by 10 basis points to 1.8 percent. 

In a brief statement, the PBC said that the move was taken to hedge against the impact of factors such as tax season peaks and maintain reasonable and sufficient liquidity within the banking system. The amount of money involved in Tuesday's move totaled 605 billion yuan ($83.03 billion) - 401 billion yuan in one-year MLF and 204 billion yuan in seven-day reserve repo.

The PBC move largely exceeded market expectations. Zhou Maohua, an economist at Everbright Bank, said that the main reason behind the unexpected move was linked to weak credit growth and growing pressure in the economic recovery. 

On Tuesday, China released a range of data for July, highlighting persistent downward pressure, even as the country's recovery continues. Retail sales rose 2.5 percent year-on-year, down from a 3.1-percent growth in June, while industrial output grew 3.7 percent year-on-year, compared to a 4.4-percent in June, according to the National Bureau of Statistics. Fixed asset investment expanded 3.4 percent year-on-year in the first seven months of 2023, compared to a 3.8-percent growth in the first half of 2023. 

Chinese officials and analysts maintained that while downward pressure remains for the Chinese economy, there are also growing signs that the economic recovery from the three-year pandemic is still underway. Pointing to the PBC's move on Tuesday, some analysts expected further more rigorous policy support to ensure stable growth in the second half of 2023. 

"The rate cuts have sent a very positive signal that the central bank is seeking to boost market confidence through lower MLF rate, which will generate positive momentum within the stock market and property market," Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management Co, told the Global Times on Tuesday. 

Yang further noted that there is currently a lack of confidence in the market, but rate cuts can boost investor confidence to a certain extent and reverse the market decline. The move could be a boon for a wide range of sectors, including finance, property and retail spending. 

More importantly, the PBC move on Tuesday further raised expectation for broader monetary policy support, including possible cuts to interest rates and the reserve requirement ratio, to boost economic growth in the second half of 2023.