The People’s Bank of China (PBOC) surprised markets by lowering its key short-term policy interest rate.
On the 22nd, the PBOC announced a seven-day reverse repo rate reduction from 1.8% to 1.7% and revealed plans to enhance its open market operations. The reverse repo rate is the short-term interest rate at which the central bank provides loans to financial institutions using government bonds as collateral.
Following the announcement, Chinese bond yields generally fell.
The PBOC stated that the rate cut aims to “strengthen economic cycle adjustments to support the real economy better” and described the move as “a step in the right direction.”
With the U.S. Federal Reserve expected to begin cutting rates soon, there is significant potential for further reductions by the PBOC.
Last month, PBOC Governor Pan Gongsheng highlighted that the seven-day reverse repo rate is a critical policy interest rate.
Zhang Zuwei, President and Chief Economist at Pinpoint Asset Management, told Reuters that the PBOC’s decision to act before the Fed indicates that the government is aware of the downward pressure on the Chinese economy.
This rate cut follows the PBOC’s recent announcement to overhaul its communication channels regarding monetary policy.
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