SHANGHAI/SINGAPORE (Reuters) – China’s central bank (PBOC) unexpectedly cut key rates for the second time in three months on Tuesday, a further sign that Chinese authorities are stepping up efforts to boost a flagging economic recovery .

Analysts believe the move opens the door to a potential prime rate (LPR) cut next week.

Collapsing credit growth and rising deflation risks in July necessitated more monetary easing measures, market watchers said, as market sentiment deteriorated.

“All of this reinforces the importance for policymakers to act quickly before consumer and business confidence deteriorate sharply,” said Tommy Wu, senior China economist at Commerzbank.

The PBOC said it cut its rate on 401 billion yuan (50.57 billion euros) in one-year loans to certain financial institutions (MLF) by 15 basis points, taking the rate to 2, 50% against 2.65% previously.

The cash injection was intended to offset factors such as tax payments to “maintain liquidity in the banking system at a reasonably high level,” the PBOC said in an online statement.

In a Reuters poll this week of 26 market watchers, 20 respondents, or 77%, predicted the central bank would leave the MLF rate unchanged. Only six respondents expected a reduction in the marginal rate.

“The surprise drop in the MLF rate was a quick response to disappointing data, which could trigger a depreciation of the yuan towards 7.3,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

“The PBOC may intend to support medium-term credit conditions through asymmetric rate cuts, and has paved the way for a cut in the LPR, particularly the 5-year LPR, to support the investment sector. distressed real estate.

The MLF rate guides the LPR rate, whose monthly fixing is scheduled for next Monday.

The central bank also injected 204 billion yuan through seven-day reverse repos while cutting borrowing costs by 10 basis points to 1.80% from 1.90% previously, it said. said in an online statement.

China remains an exception among global central banks, as it eased monetary policy to support a faltering recovery, while other central banks engaged in tightening cycles to fight high inflation.

Tuesday’s rate change widened the yield gap with other major economies, particularly the United States, adding pressure on the yuan and risking triggering capital outflows.

The yuan has lost around 5% against the dollar since the start of the year and has become one of the worst performing Asian currencies. It traded at 7.2761 to the dollar at 06:08 GMT, against a closing price of 7.2580.

Yields on Chinese 10-year government bonds fell to 2.56%, their lowest level since May 2020.

(Reporting Winni Zhou and Rae Wee; Corentin Chapron, editing by Kate Entringer)

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