LPRs Follow Repo Cut With 10bps Reduction For 1yr & 5yr Tenors
Given uncertainty driven by US politics and a drive towards making the 7 day repo rate a more significant policy tool, the cut in the reverse repo in China this morning is likely seen as a calming measure. The rate reduction should be supportive of markets which are digesting further output from the Plenum and news of Biden's departure. Equity futures reacted positive to the liquidity support.
This was the first reduction in the repo rate since August. Policy makers have found it difficult to act with bond yields marching lower and currency depreciation. The cut was alongside the PBOC allowing institutions participating in MLF operations to apply for reduction or exemption of collaterals. With policy announcements muted during the Plenum these measures are being announced now as policy to ease the downward pressure on bond market yields.
Following on from the cut in the reverse repo there was a 10bps cut to the the 1 and 5 year LPR’s, against estimates of no change. China appears determined to support local liquidity/ease the interest rate burden, given global economic uncertainty and declining domestic growth.