On Monday, in a move that further eases liquidity in China’s slowing economy, People’s Bank of China (PBOC) stated on its website that it was lowering the seven-day reverse repurchase rate to 2.50% from 2.55%.
This is the first easing in the liquidity tool in more than four years and is a signal to markets that policymakers are ready to act and provide support to a slowing economy.
According to analysts, the unexpected cut in rates shows that the central bank is keen to ease investor worries that higher inflation will prevent it from delivering fresh stimulus measures.
According to Zhou Hao, an economist at Commerzbank in Singapore, the reverse repo rate cut indicates a policy change in coming months, including “some fine-tuning to prioritize the pro-growth policy for the time being.”
Widespread incidents of African Swine Fever has taken a toll on pig herders, as a result of which pork prices have gone up the roof. Consumer inflation has surged past the government’s target of around 3% in October to its fastest pace in almost eight years.
“I expected an easing move from the PBOC, just didn’t know when,” said a Hong Kong-based portfolio manager. “The (high) Consumer Price Index (CPI) was only pig CPI. Everything else is in big trouble.”
He went on to vote, the PBOC is continuing in its efforts to take a cautious approach to easing consumer inflation. In a report that was released on Saturday, the PBOC said it “would maintain prudent monetary policy to prevent inflation from spreading”.
Markets participants believe the two rate cuts in the open market operations suggest a similar adjustment in its newly established Loan Prime Rate.
The PBOC is scheduled to announce its monthly LPR fixing on Wednesday.
Incidentally, the PBOC has skipped reverse repo operations for 15 straight trading days before resuming it on Monday, when it injected $25.74 billion (180 billion yuan) into the interbank market.