China central bank cuts a key loan rate for first time since 2016 as growth slows

By Trend

China’s central bank cut the interest rate on its medium-term lending facility (MLF) on Tuesday for the first time since early 2016, as policymakers work to prop up a slowing economy hit by weaker demand at home and abroad, Trend with reference to Reuters reports.

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

But some analysts said Tuesday’s reduction, though modest, may be a sign the central bank is turning more proactive.

The People’s Bank of China (PBOC) said it was lowering the rate on its one-year medium-term lending facility (MLF) loans to financial institutions CNMLF1YRRP=PBOC by 5 basis points to 3.25% from 3.30% previously.

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

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

“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,” he said.

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

The Chinese currency CNY=CFXS has risen to 2-1/2 month highs against the dollar this week amid signs that Washington and Beijing may be inching toward a deal that could de-escalate their protracted trade war.

The PBOC said it had lent 400 billion yuan ($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 on Tuesday.

Julian Evans-Pritchard, senior China economist at Capital Economics, noted that the rate cut was the first reduction in a PBOC lending facility rate in more than three years.

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

But he said a five-basis-point cut won’t be enough to drive a turnaround in credit growth, which has started slowing again recently.

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