China cuts third key policy rate to prop up economy, while US Federal Reserve pauses hikes

People’s Bank of China lowered the interest rate on its one-year medium-term lending facility (MLF) loans to financial institutions from 2.75 to 2.65 per cent on Thursday
Overnight, the US Federal Reserve voted to hold its benchmark lending rate at between 5 and 5.25 per cent, ending a run of 10 straight increases since March 2022

China's economic recovery

Frank Tangin Beijing

Published: 9:26am, 15 Jun 2023

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China’s central bank on Thursday cut the interest rate on its medium-term funding for financial institutions, marking its third policy rate change in three days amid efforts to support the slowing economy through renewed monetary loosening.

The People’s Bank of China (PBOC) lowered the rate on its one-year medium-term lending facility (MLF) loans to financial institutions from 2.75 to 2.65 per cent.

In a statement, the central bank said that it injected 237 billion yuan (US$33 billion) through the liquidity tool.

Overnight, the US Federal Reserve voted to hold its benchmark lending rate at between 5 and 5.25 per cent, citing a robust job market and modest economic expansion, ending a run of 10 straight increases since March 2022.

The key takeaway is that while 10 basis point cuts won’t make much difference on their own, they reveal growing concerns among officials about the health of China’s recovery

Julian Evans-Pritchard

The monetary policy divergence has widened the gap between China and US interest rates, continuing to place pressure on China’s capital outflows.

On Tuesday, the PBOC cut the seven-day reverse repo rate from 2 to 1.9 per cent when it sold 2 billion yuan (US$280 million) of the liquidity tool, before the central bank also trimmed the rate on its standing lending facility loans.

“The PBOC has just announced a 10-basis-point cut to the one-year rate on its medium-term lending facility, a key tool for providing funding to banks. This follows Tuesday’s surprise cuts to short-term policy rates,” said Julian Evans-Pritchard, head of China economics at Capital Economics.

“The key takeaway is that while 10-basis-point cuts won’t make much difference on their own, they reveal growing concerns among officials about the health of China’s recovery and are likely to be followed by wider policy easing.”

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Market sentiment recently plunged amid a string of weak economic data, and worries over China’s post-coronavirus prospects have held back private and foreign investors.

The policy-rate changes also indicate that bigger easing may be on the agenda of Beijing’s policymakers.

The 24-member Politburo, a prime decision-making body headed by President Xi Jinping, is due to analyse the economic situation and decide its next moves in late July.

The central bank refrained from launching a big stimulus in the past three years, considering that the national debt level had already reached a high level and that returns on infrastructure investment kept falling.

The PBOC instead created 17 structural tools to address the financing problems in areas including private business, property delivery, logistics and tech innovation, with the outstanding size reaching 6.8 trillion yuan (US$950 billion) by the end of March, representing 16.2 per cent of its total assets.

China’s new bank loans totalled 12.68 trillion yuan in the first five months of the year, up 16.6 per cent from a year earlier, government data showed.

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UBS economists said on Wednesday that around 15 to 20 per cent of this year’s new bank credit may be used by local government financing vehicles or property developers to repay interests or debt, meaning less actual support for market entities.

They expect that the loan prime rate, which is linked to mortgage loans, will also be cut next week.

The MLF could also be cut again this year, they added, citing the central bank’s pledge to lower financing costs.