China’s central bank cuts interest rate on loans to banks by biggest amount since 2015

The first PBOC policy rate cut since February is in line with the pledge to increase support to the economy

Pedestrians wearing protective masks walk past the People's Bank of China (PBOC) building in Beijing, China, on Tuesday, March 17, 2020. China suffered an even deeper slump than analysts feared at the start of the year as the coronavirus shuttered factories, shops and restaurants across the nation, underscoring the fallout now facing the global economy as the virus spreads around the world. Photographer: Qilai Shen/Bloomberg
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China's central bank cut the interest rate it charges on loans to banks by the biggest amount since 2015, as the authorities ramp up their response to the worsening economic impact of the coronavirus pandemic.

The People's Bank of China on Monday said it would reduce the interest rate on seven-day reverse repurchase agreements to 2.2 per cent from 2.4 per cent when it injects 50 billion yuan (Dh25.8bn/US$7.04bn) into the banking system.

The central bank said this would keep liquidity sufficient to help the real economy.

The first cut to a PBOC policy rate since February is in line with a pledge by the Communist Party’s leadership on Friday to increase support to the economy through increased sales of sovereign debt, as domestic and international demand slumps due to the pandemic.

The step also brings the PBOC closer in line with the stance of global peers, who have loosened policy dramatically in recent weeks.

“The larger-than-usual rate cut is an indication expression that China is willing to join the co-ordinated consortium for economic stabilisation,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong.

“Small and medium-sized businesses are collapsing for lack of cash flow.”

A reduction in the central bank’s main tool to adjust the price of market liquidity also signals coming reductions in its main one-year funding tool, and potentially a corresponding cut to the benchmark deposit rate.

Reductions to policy rates should also be reflected in the main market benchmark of the cost of lending to companies, the loan prime rate.

“Lowering banks’ lending rates without a reduction in the cost of their liabilities will squeeze banks’ net interest margin, eroding their profitability and capital base,” said Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Bank.

“A benchmark deposit rate cut is necessary.”

China will increase its fiscal deficit as a share of gross domestic product, issue special sovereign debt and allow local governments to sell more infrastructure bonds as part of a package to stabilise the economy, according to a Politburo meeting on Wednesday, Xinhua reported late on Friday.

In a separate statement on Friday, the PBOC called for better co-ordination of global macro policies, while re-emphasising that it would keep liquidity sufficient to help with the real economy and watch out for inflation risks.

The cut on Monday signals that the PBOC has entered "a stage with stronger counter-cyclical adjustment," out of consideration for both domestic demand and the global virus outbreak, Ma Jun, a PBOC adviser, said.

“The PBOC doesn’t use its bullets all at once. China still has plenty of room in monetary policy.”

Economists have lowered their median forecast for economic growth to 2.9 per cent for 2020, the slowest pace since 1976.

China’s policymakers had until recently maintained a relatively cautious programme of easing, mindful of the nation’s heavy debt load and of risks to financial stability.

While the Politburo statement and the PBOC move signal the response is moving up a gear, it still falls short of a no-holds-barred stimulus.

“Certainly, the policy easing is continuous and today’s liquidity injection at least suggests that the policy aid will be mildly constant and will be more proactive when the authorities deem necessary,” said Zhou Hao, an economist at Commerzbank.

“The PBOC is signalling its full support on the special bond issuance, so cuts to the medium-term lending rate and benchmark deposit rate are coming. China is joining the global easing wave.”