China’s central bank surprised most economists and market participants by cutting a short-term policy interest rate, a sign that officials are increasingly concerned about faltering growth and are stepping up stimulus to boost the recovery. The People’s Bank of China lowered the seven-day reverse repurchase rate by 10 basis points to 1.9% on Tuesday, the first reduction in the rate since August 2022. That increases the likelihood the central bank will reduce its one-year loan rate on Thursday, with banks expected to lower their lending rates shortly after.
Tuesday’s move underlines heightened concern about a slowdown in growth: recent economic indicators showed inflation remained near zero in May, manufacturing activity contracted and an early rebound in the property market has fizzled. Speculation is growing that the PBOC may cut interest rates even further this year, while Beijing is considering a broad package of stimulus measures. “Policymakers are finally acknowledging the economic weakness,” said Michelle Lam, Greater China economist at Societe Generale SA. “There should be more interest rate and reserve requirement ratio cuts in the second half of 2023.” Goldman Sachs Group Inc. economists forecast a 25 basis-point cut to the reserve requirement ratio for lenders — which will free up more money for banks to boost lending — in the third quarter. Another cut to the ratio or policy rates could happen in the fourth quarter depending on the economy’s performance, they wrote in a research note Tuesday. Macquarie Group Ltd. expects a 10 basis-point cut in the one-year medium term lending facility rate in the third quarter after a cut later this week. The timing of Tuesday’s move suggests the PBOC may be trying to get “ahead of the curve” and the US Federal Reserve’s upcoming policy meeting “to mitigate the rate cut impact on the yuan,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd. in Hong Kong. Economists expect the Fed to finally pause its aggressive rate-hiking cycle this week. PBOC may be worried about the potential shocks to the market and so it took this opportunity to try to appease concerns in advance.” NN: China is lowering rates the rest of the world is raising them. China has virtually no inflation and all the money in the world to stimulate its economy. As it reopens from years of lockdowns….