Wed, Nov 06, 2019 - Page 10 News List

China cuts key rate first time since 2016

‘REALLY tiny’:The reduction sends the message that the central bank does not want the market to suspect its resolve to support growth, a Commerzbank economist said

Reuters, SHANGHAI

The People’s Bank of China yesterday cut the interest rate on its medium-term lending facility (MLF) for the first time since early 2016, as policymakers work to prop up a slowing economy hit by weaker demand at home and abroad.

With growth cooling faster than expected and nearing 30-year lows, a number of economists worry there is a risk that Chinese policymakers might be falling behind the curve by moving too cautiously.

However, some analysts said the reduction, though modest, might be a sign the central bank is turning more proactive.

The bank said it was lowering the rate on its one-year medium-term lending facility loans to financial institutions by 5 basis points to 3.25 percent.

The move could pave the way for a reduction in China’s new benchmark loan prime rate in a few weeks. It is linked to the MLF rate and is published on the 20th of every month.

The cut, while “really tiny,” sends a message that the central bank does not want the market to doubt its will to support growth, said Zhou Hao (周浩), senior emerging markets economist at Commerzbank AG in Singapore.

“They tried to maneuver in a limited space... It does not change the overall picture that aggressive easing is not on the table. On the micro level there’s still some targeted support from policymakers,” Zhou said.

Recent gains in the yuan might have strengthened the central bank’s hand and given it more confidence to move now, Zhou added.

The Chinese currency has risen to two-and-a-half-month highs against the US dollar this week amid signs that Washington and Beijing might be inching toward a deal that could de-escalate their protracted trade dispute.

The central bank said it had lent 400 billion yuan (US$56.92 billion) to financial institutions through the liquidity tool, slightly less than a batch of MLF loans worth 403.5 billion yuan due to mature yesterday.

The rate cut was the first reduction in a lending facility rate in more than three years, Capital Economics Ltd senior China economist Julian Evans-Pritchard said.

“It will lower funding costs for banks and, as a result, banks should be more willing to lower lending rates,” Evans-Pritchard said.

However, a 5 basis-point cut would not be enough to drive a turnaround in credit growth, which has started slowing again recently, he added.

“We expect another 70 bps of reductions in the MLF rate by the middle of next year,” he said in a note to clients.

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