SHANGHAI - China’s central bank lowered a short-term lending rate for the first time in 10 months on Tuesday, in a bid to restore market confidence and prop up a stalling post-pandemic recovery in the world’s second-largest economy.

Recent economic data has shown subdued demand and weaker investor sentiment, raising expectations that the authorities will ease monetary policy to sustain growth.

The People’s Bank of China (PBOC) cut its seven-day reverse repo rate by 10 basis points (bps) to 1.9 per cent from 2 per cent on Tuesday, when it injected 2 billion yuan (S$374.9 million) through the short-term bond instrument.

“The central bank’s rate cut decision was not a complete surprise to the market,” said Mizuho Bank chief Asian FX strategist Ken Cheung.

“Commercial banks have already lowered deposit rates, and PBOC governor Yi Gang also mentioned strengthening counter-cyclical adjustment recently.”

He added that the PBOC may have wanted to soften the impact of future policy easing on the Chinese renminbi ahead of the US Federal Reserve’s policy meeting this week.

An interest rate cut in China could further widen the yield gap with the United States, even if the Fed pauses in June.

A change in China’s seven-day repo rate typically signals changes in longer-term rates are likely.

The renminbi eased to 7.1646 per US dollar after the rate decision, the weakest since Nov 29, 2022.

“The 10bp cut in the open market operations reverse repo rate can be seen as a precursor to an MLF (medium-term lending facility) rate cut this Thursday,” said OCBC Bank rates strategist Frances Cheung.

“Rates may continue to trade on the soft side, but given much economic pessimism and a rate cut are already in the price, we see limited downside to rates from here.”

China is due to roll over a 200 billion yuan MLF loan on Thursday. REUTERS