China Central Bank Announced Surprising 15bp Key Rate Cut

The People’s Bank of China recently announced a decision for a 15 basis points cut to the six months to one-year medium-term lending facility (MLF) rate from 2.65 to 2.5% as the second largest economy deepens.


Such move came after last week’s report of July consumer price index and producer price index, which is the index representing consumer spending on retail sales and industrial output, appeared to decline and entered to the what many economists called a “deflation territory.”


Furthermore, the ongoing drag in the property sector, pressuring local government debts, high youth unemployment, and cooling foreign demand impose critical challenges to creating a sustained economic recovery, emphasizing the need for policymakers to give more support measures.


What makes this 15 cut serious enough is it followed a 10-basis point cut in June as the economic data continues to slump. According to Becky Liu, Head of China macro strategy and standard chartered “the cut has been aggressive, indicating the urgency of stepping up measures to shore up credit growth.


Chief Asian FX strategist at Mizuho Bank Ken Cheung said,  “The PBOC may intend to support the medium-term credit conditions via the asymmetric cut, and opened the way for a cut to Loan-Prime-Rate (LPR), especially the 5-year LPR, to support the struggling property sector.”


In other words, the MLF rate serves as a guide to the Loan-Prime-Rate, and markets mostly use the medium-term policy rate as a guiding direction to commercial banks’ lending benchmarks decisions. A way expected to help stimulate the real estate market. The monthly fixing of the LPR is due next Monday.


Yet, the MLF rate cut is no final measure as The Chinese Politburo, China’s cabinet, also called on additional policy actions to boost domestic demands.