China cuts short-term interest rate to kickstart economy

The People’s Bank of China said it was lowering the seven-day reverse repo rate to 1.9% from 2.0%, the first such move since August last year.

The seven-day reverse repo is the short-term interest paid by the central bank on loans from commercial lenders, and a decrease in the rate is expected to increase domestic money supply and stimulate spending.

Analysts had predicted monetary easing measures in the coming weeks, but in the form of a cut to the required reserve ratio — the amount of cash banks are required to hold — rather than a rate cut, Capital Economics economist Julian Evans-Pritchard wrote in a note on Tuesday.

The cut reveals “growing concerns among policymakers about the health of China’s recovery”, Evans-Pritchard wrote.

Chinese authorities have announced a series of lacklustre economic indicators in recent months, pointing to a slowdown in the country’s post-Covid recovery.

Consumer prices rose only 0.2% on-year in May, while factory activity shrank last month for the second consecutive month.

Beijing has kept interest rates low compared with other major economies, but the near-zero inflation highlights challenges faced by policymakers as they try to stimulate growth.

China’s six largest state-owned commercial banks cut interest rates for savers on Thursday to boost spending, according to announcements on their websites, after being asked by the central bank.

Ting Lu, Chief China Economist at Nomura, said Tuesday’s cut means the central bank will “almost surely deliver” cuts to other key interest rates, the one-year medium-term lending facility rate and the loan prime rate, later this month.