China cuts medium-term loan rates as economy sputters, more easing expected

SHANGHAI – China’s central bank cut the borrowing cost of its medium-term policy loans for the first time in 10 months on Thursday, in line with expectations, as Beijing ramps up stimulus measures to shore up a shaky economic recovery.

The move comes just days after it lowered two key short-term policy rates, a sign that the authorities are increasingly concerned about the economy’s fragility despite the dismantling of tough Covid-19 measures in December.

The cuts could also pave the way for reductions in China’s benchmark lending rates for households, businesses and mortgages when they are set next Tuesday.

The country’s economy stumbled in May, with industrial output and retail sales growth missing forecasts, according to data released on Thursday.

Industrial output grew 3.5 per cent in May from a year earlier, the National Bureau of Statistics said on Thursday, slower than the 5.6 per cent expansion in April.

Retail sales – a key gauge of consumer confidence – rose 12.7 per cent, missing forecasts of 13.6 per cent growth and slowing from April’s 18.4 per cent.

Data this week showed a sharp slowdown in broad credit growth in May.

The People’s Bank of China said it lowered the rate on 237 billion yuan (S$44.4 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.65 per cent, from 2.75 per cent previously.

Recent data has shown recovery in the world’s second-largest economy is stalling as domestic and global demand falters and the crisis-hit property sector fails to gain traction, raising expectations that the authorities need to do more to spur growth.

Analysts say policymakers in Beijing may be wary of unleashing more aggressive stimulus measures while other global central banks are raising interest rates to combat inflation, which could risk further capital outflows from China. The country’s renminbi currency has already lost nearly 4 per cent so far in 2023, skidding to six-month lows.

More help on the way?

“In the next nine months... we now expect the central bank to continue its monetary easing cycle with an additional 30 basis point of policy rate cuts in total, 50 basis points of reserve requirement ratio cuts and 60-80 basis points of mortgage rate cuts for both new and existing home loans,” economists at Barclays said in a note.

Goldman Sachs said an expected cut in banks’ reserve requirement ratio may be postponed to the third quarter, as historically the central bank has almost never cut the policy rate and reserve ratio within the same month.

With 200 billion yuan worth of MLF loans set to expire in June, Thursday’s operation resulted in a net 37 billion yuan of fresh fund injection into the banking system.

The central bank also injected two billion yuan through seven-day reverse repos at 1.9 per cent, it said in an online statement.
 REUTERS