MNI BRIEF: PBOC In Surprise Rate Cut As Recovery Stalls

The People’s Bank of China unexpectedly cut two key policy rates for a second time in three months Tuesday, as recent disappointing financial and economic indicators pointed to stronger headwind s.

The central bank cut the rate of one-year medium-term lending facility by 15bp to 2.5% when rolling over the maturing CNY400 billion MLF with a renewed CNY401 billion facility. It also lowered the rate on the 7-day reverse repo rate by 10bp to 1.8%, while injecting a net of CNY198 billion via the instrument.

The cuts surprised markets as the PBOC last trimmed these two rates by 10bp respectively in June. Normally, the interval of policy rate adjustment is at least 5 months, except for 2020 when the outbreaks of Covid-19 epidemic pushed PBOC to cut the MLF rate in February and April.

Offshore yuan fell below the 7.31 mark following the rate cuts, weakening by more than 300 bp within a day, though the currency quickly stabilized and rose in a straight line. The onshore and offshore yuan were quoted at 7.2760 and 7.2950, respectively, against the U.S. dollar as of 10:30 am Beijing time.