China seen cutting rates further to support economic recovery

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China seen cutting rates further to support economic recovery
Credit: © Reuters.

Investing.com -- Expectations for more interest rate cuts from the People’s Bank of China grew this week after the central bank trimmed short-term rates on Tuesday, amid a slowing economic recovery in the country. 

The PBOC cut its 7-day reverse repo rate and standing lending facility rate by 10 basis points (bps) on Tuesday, its first cut to borrowing rates in 10 months.

The move signals more cuts by the central bank in the coming weeks, as it moves to shore up a stalling economic recovery in the country.

A Reuters poll showed that market expectations are building for more rate cuts by the PBOC on Thursday, specifically of its one-year Medium-term lending facility rate, with general consensus being for a 10 bps cut to 2.65%. 

A cut in the MLF generally precedes a similar cut in the PBOC’s Loan Prime Rate (LPR), with Citic Securities forecasting an at least 10 bps cut in the five-year LPR, which currently stands at 4.30%.

The PBOC is set to decide on the LPR on June 20.

The LPR is used to determine mortgage rates, with a cut in the rate potentially reflecting more measures from Beijing to support a flailing property sector. But Goldman Sachs recently warned that China may not provide as much support to the sector as previously assumed, as it moves to reduce the economy’s reliance on the sector.

A string of weak economic indicators showed that a post-COVID economic recovery in China is running out of steam. Data released on Tuesday also showed that credit growth in the country was slowing down, as new loans and outstanding loan growth both grew less than expected in May, as did total social financing.

The Chinese yuan hit a new six-month low on Tuesday after the rate cut, and was trading near those lows on Wednesday. The currency recently breached the closely-watched 7 level against the dollar, and is likely to see increased weakness as the gap between local and international rates widens.

The latest rate cuts make the PBOC a key outlier among global central banks, which are either hiking rates or holding them higher for longer.

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