Sign up now for FREE unlimited access to Reuters.com Register SHANGHAI, Aug 15 (Reuters) – China’s central bank unexpectedly cut a key interest rate for the second time this year and pulled some cash from the banking system on Monday in a bid to revive credit demand to support the economy hit by the COVID-19. Economists and analysts said they believe Chinese authorities want to prop up the sluggish economy by allowing a widening policy divergence with other major economies that are aggressively raising interest rates. The People’s Bank of China (PBOC) announced that it is cutting the interest rate on its 400 billion yuan ($59.33 billion) one-year medium-term lending facility (MLF) to certain financial institutions by 10 basis points (bps) to 2.75%. from 2.85%. Sign up now for FREE unlimited access to Reuters.com Register In a poll of 32 market watchers last week, all respondents had predicted the MLF rate would remain unchanged and 29 had predicted there would be a partial shift. read more “The rate cut surprises us,” said Xing Zhaopeng, senior China strategist at ANZ. “It should be a response to the weak credit data on Friday. The government remains cautious on growth and will not let it go.” New bank lending in China fell more than expected in July, while broad credit growth slowed as fresh outbreaks of COVID, job concerns and a deepening housing crisis made companies and consumers worried about the taking on more debt. read more The PBOC attributed its move to “keeping the liquidity of the banking system sufficiently abundant.” And with 600 billion yuan worth of MLF loans maturing, the act resulted in a net withdrawal of funds of 200 billion yuan. Market participants largely priced in the partial shift as the banking system was already flush with cash, with interbank rates hovering at two-year lows and persistently below policy rates. “Now with hindsight, today’s 10bp cut can be seen as ‘front-loading’ before the policy margin tightens going forward as the PBOC sees structural pressures on inflation,” said Frances Cheung, rate strategist at OCBC Bank. The PBOC reiterated that it will step up the implementation of its prudent monetary policy and keep liquidity fairly abundant while closely monitoring changes in domestic and external inflation, it said in its second-quarter monetary policy report. “Despite the warning about inflation risk and liquidity situation, the dominant downside risks due to the spread of COVID and the property sector disaster prompted the PBOC to cut interest rates to stimulate demand,” said Ken Cheung, chief strategist of Asian FX at Mizuho Bank. China’s 10-year bond futures jumped more than 0.7 percent in early trade after the interest rate decision, while government bond yields for the same period fell about 5 basis points. The central bank also injected 2 billion yuan through seven-day repo, while cutting borrowing costs by the same margin of 10 bps to 2.0 percent from 2.1 percent, according to an online statement. The PBOC cut both interest rates by 10 bps in January. ($1 = 6.7425 Chinese Yuan) Sign up now for FREE unlimited access to Reuters.com Register Reporting by Winni Zhou and Brenda Goh. Editing by Kim Coghill and Neil Fullick Our Standards: The Thomson Reuters Trust Principles.
