China surprised markets on Monday by cutting its short-term policy rate and benchmark lending rates in a bid to boost the country’s growth.
The cuts come as China posted last week economic indicators are weaker than expected for the second quarter, and that its key leaders meet in a plenum held roughly every five years.
The country is on the brink of deflation and faces a prolonged housing crisis, rising debt and weak consumer and business sentiment. Trade tensions are also rising, with world leaders increasingly wary of China’s export dominance.
The People’s Bank of China (PBOC) said on Monday that it will cut the seven-day deposit premium rate to 1.7 percent from 1.8 percent, as well as improve its open market operations mechanism.
Minutes later, China cut its benchmark lending rates by the same amount during a monthly fix. The one-year prime lending rate has been reduced to 3.35% from the previous 3.45%, and the five-year prime lending rate has been reduced to 3.85% from 3.95%.
An unexpected decision
“Today’s cut is an unexpected decision, probably related to the sharp slowdown in growth dynamics in the second quarter, as well as the call to “achieve this year’s growth target” in the third plenum.Larry Hu, Macquarie’s chief China economist, analyzes.
Ju Wang, head of currency and rates strategy for Greater China at BNP Paribas, believes that rising expectations of rate cuts From the US Federal Reserve also gave the PBOC room to ease monetary policy.
After those rate cuts, the Chinese yuan fell to an almost two-week low of 7.2750 per dollar before paring its losses.
Chinese sovereign bond yields fell across the curve, with the 10-year and 30-year notes losing up to 3 basis points before settling at 2.24% and 2.45%, respectively.
“The PBOC’s failure to wait for the Fed to cut interest rates first shows that the government recognizes the downward pressure on China’s economy”, Judge Zhang Zhiwei, President and Chief Economist of Pinpoint Asset Management. He expects more rate cuts in China as the Fed enters its rate-cutting cycle.