China announced an unexpected lowering of its key short-term policy rate and its benchmark lending rates on Monday with the aim of boosting economic growth. The cuts follow weaker-than-expected second-quarter economic data last week which revealed that China’s economy grew 0.7 percent in the second quarter compared to the first quarter, below the expectations of most economists. The world’s second-largest economy grew at an annual rate of about 2.8 percent, just below half the rate it recorded in the first quarter of 2024.
Lending rates decline
The People’s Bank of China (PBOC) said on Monday it would cut the seven-day reverse repo rate to 1.7 percent from 1.8 percent. In addition, it would also improve the mechanism of open market operations. Following this announcement, China cut benchmark lending rates. The one-year loan prime rate (LPR) declined to 3.35 percent from 3.45 percent previously, while the five-year LPR was reduced to 3.85 percent from 3.95 percent.
As China edges closer to deflation, it still faces a property crisis, surging debt, and weak consumer and business sentiment. In addition, trade tensions are on the rise, as global leaders grow increasingly concerned about China’s export dominance.
Read: Bank of England rate cut bets rise as inflation steadies at 2 percent target
Fed rate cut prospects support policy easing
Analysts said that rising expectations of the U.S. interest rate cut by the Federal Reserve gave China’s central bank room to ease its lending rates as the yuan weakens against the dollar.
With a commitment to reach this year’s growth targets, the central bank also made adjustments to its lending program. The bank added that it will lower collateral requirements for its medium-term lending facility loans.
Following the cuts to leading rates, China’s yuan dropped to almost a two-week low of 7.2750 per dollar, before rising 0.04 percent to 7.2729 yuan per dollar. Chinese sovereign bond yields fell while 30-year treasury futures for September 2024 delivery rose marginally in early trading.
Markets now expect China to cut rates even further after the Fed begins a rate-cutting cycle.
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