The People’s Bank of China (PBOC) unexpectedly cut its key 7-day reverse repo rate by 10 bps to 1.7% on Mon. It signals policymakers’ concerns over the slowing growth, UOB Group Economist Ho Woei Chen notes.
PBOC cuts rates amid the slowing growth
“PBOC unexpectedly cut its key 7-day reverse repo rate by 10 bps to 1.7% on Mon, prompting banks to lower the 1Y and 5Y LPRs by a similar quantum to 3.35% and 3.85% respectively. The earlier than expected rate cut in Jul likely signaled policymakers’ concerns over the slowing growth while the easing pressure on the CNY could also be a factor.”
“The central bank had left its 1Y medium-term lending facility (MLF) rate unchanged at 2.50% last week. The move today indicates that PBOC is shifting to the 7-day reverse repo rate as the main policy benchmark.”
“We still see room for an additional 15 bps rate cut for the rest of this year to bring the 1Y LPR lower to 3.20% by end-4Q24. Given the convergence of the 1Y and 5Y LPR, the room for the 5Y LPR to be further lowered may be more limited and we thus expect it to stay on hold at 3.85% through the rest of 2024. In the near-term, there is also the possibility of a 50 bps cut to the reserve requirement ratio (RRR).”
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