SHANGHAI/SINGAPORE (Reuters) – China’s central bank on Tuesday cut its key short-term interest rate for the first time in 10 months in a bid to restore market confidence and spur a flagging post-pandemic recovery.

The reduction in the short-term rate indicates that longer-term rates could in turn be eased in the coming weeks as investor sentiment deteriorates and demand weakens, two additional arguments in favor of monetary easing to support growth.

The People’s Bank of China (PBC) cut its seven-day repo rate by 10 basis points (bps) to 1.90% from 2.00% on Tuesday, after injecting two billion yuan (258.99 million euros) through this short-term bond instrument.

“The central bank’s decision to cut rates didn’t take markets entirely by surprise,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

“Commercial banks have already lowered their deposit rates, and PBC Governor Yi Gang also recently mentioned tightening countercyclical adjustment measures.”

The yuan hit a six-month low of 7.1680 per dollar after the central bank’s decision, while Chinese 10-year sovereign bond yields fell to a new 7.5-month low of 2.640 %.

According to Ken Cheung, the BPC may have sought to limit the impact of future monetary policy easing on the yuan, ahead of the US Federal Reserve (Fed) meeting this week.

The PBC is an exception among global central banks in easing monetary policy as its major counterparts engage in a cycle of rate hikes.

Further interest rate cuts in China would only widen the yield gap with the United States, even if the Fed were to take a break this week, putting pressure on the yuan and accelerating capital outflows.

China is due to release May data on loans and several activity indicators this week, including retail sales and industrial production.

Tuesday’s decision suggests policymakers are increasingly worried about the strength of China’s recovery, traders and analysts said.

“This reminds the market that the Chinese economy still faces challenges during its recovery,” said Marco Sun, chief financial market analyst at MUFG Bank (China).

“However, the market expects the PBC to cut its policy rate further. The PBC may in fact make marginal adjustments to the policy rate to stimulate credit growth and limit inflation concerns over the next few months. quarters.”

Bloomberg, citing unnamed sources, reported Tuesday that China is considering at least a dozen stimulus measures, including interest rate cuts to support sectors like real estate and domestic demand.

The next rate adjustment could take place as early as Thursday, when the central bank will have to renew 200 billion yuan (25.90 billion euros) of medium-term loan facilities (MLF).

“The 10 basis point cut in the repo rate can be seen as a precursor to an MLF rate cut on Thursday,” said Frances Cheung, rate strategist at OCBC Bank.

“Rates could continue to be under pressure, but prices are already pricing in a healthy dose of pessimism about the state of the Chinese economy and further rate cuts, which will limit downside potential.”

Markets are also expecting the loan base rate (LPR), used to set rates for consumer loans and mortgages, to be cut by the same amount as the repo rate next Tuesday. .

And some investment banks are forecasting a 25bp reduction in the required reserve ratio (RRR), the amount of cash banks must hold in reserve, this year.

“There may be less urgency to cut the RRR rate after Tuesday’s rate cut. We now expect the 25 bps RRR cut we had planned for June to take place in the third quarter instead.” , write the economists of Goldman Sachs in a note.

“There could be another RRR cut or further rate cuts in the fourth quarter, depending on how the economy behaves in the coming months.”

(Report Winni Zhou, Tom Westbrook, Corentin Chapron, edited by Blandine Hénault)

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