China’s central bank unexpectedly cut interest rates on medium-term and short-term loans today, the second time in three months that it has cut interest rates on medium-term loans. The decision came at the same time as statistics showed a worse development than expected. China is easing monetary policy to support the economic recovery. Analysts said the announced move opens the possibility that the central bank could cut the key primary lending rate (LPR) next week, Reuters reported.
The central bank cut the interest rate on one-year medium-term loans (MLF) by 0.15 percentage point to 2.50 percent. This financial injection is to help maintain reasonably high liquidity in the banking system, the central bank said. Analysts had largely expected the bank to keep the MLF unchanged.
Later, the central bank said it also cut by 0.1 percentage point the short-term lending facility (SLF) rates used by commercial banks to meet temporary cash demand. The overnight rate fell to 2.65 per cent, the seven-day rate to 2.80 per cent and the monthly rate to 3.15 per cent.
Analysts said sharp credit growth and the rising risk of deflation in July necessitated further monetary easing measures to stem the slowdown. Financial market confidence was also affected by the risk of bankruptcy of some housing developers and delays in payments by private wealth managers.
“All of this adds to the urgency for monetary policymakers to act quickly before consumer and business confidence deteriorates sharply,” said Tommy Wu, chief China economist at Commerzbank Financial Institute.
Today’s report from China’s statistics bureau showed that the country’s industrial production rose 3.7 percent year-on-year in July. The growth rate thus slowed from 4.4 percent in June and was lower than analysts had expected. Retail sales rose 2.5 percent year-on-year, the slowest pace since December. Growth was weaker in July despite the summer tourist season and also missed analysts’ estimates. Retail sales are an indicator of consumption.
New support measures
Chinese policymakers unveiled a series of stimulus measures last month, from encouraging car and home appliance purchases to easing some restrictions on real estate to pledging support for the private sector as the recovery from the end of the covid-19 pandemic has been losing momentum since the second quarter. However, persistent problems in the real estate sector, rising local government debt, high youth unemployment and cooling external demand continue to pose obstacles to sustained economic growth.