China’s central bank took another step to lower borrowing costs on Tuesday to encourage lending amid growing downward pressure on the economy, implementing a small cut in the interest rate on the medium-term lending facility (MLF), a key reference used by banks to price their loans.
The People’s Bank of China (PBOC) reduced the interest rate on the one-year MLF by 5 basis points to 3.25%, the first cut since the interbank market instrument was introduced in 2016, it said (link in Chinese) on its website. The central bank simultaneously announced it had handed out 400 billion yuan ($56.83 billion) to banks in one-year MLF loans, the first use of the facility since Oct. 16, to roll over 403 billion yuan of maturing debt.
“After keeping interbank rates broadly stable for most of this year, the PBOC is starting to take more direct steps to push down borrowing costs,” China analysts at research firm Capital Economics wrote in a note. “We think this could mark the beginning of a series of PBOC rate cuts,” they said, pointing out that this is the first reduction in over three years to the rates on any of the PBOC’s lending facilities.
More from Reuters:
Chinese government bonds have sold off in recent weeks on concerns that authorities may be moving to a more cautious policy stance, despite a sharper-than-expected economic slowdown.
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.
China’s central bank has finally helped put the brakes on the downward spiral in government debt.
The relief was apparent: China’s benchmark 10-year yield dropped the most since August, while bond futures rose as much as 0.41%. The cost on 12-month interest rate swaps fell the most in a month. But skeptics say the reduction doesn’t represent a direct cut in borrowing costs to the economy, showing Beijing is sticking to its prudent approach to stimulus amid a spike in inflation.
It was hardly a tearaway response with the curve flattening. It’s not clear yet that it signals more aggressive easing with protein inflation etc still flying:
But every little bit helps, I guess!