Bank bucks global trend with interest rate cut -
interest rate

Bank bucks global trend with interest rate cut

Central banks all across the world have been hiking interest rates over recent months in a bid to lower inflation. These moves have put tremendous pressure on households and businesses when many are already struggling financially. However, one central bank recently bucked a global trend by cutting a key interest rate for the second time this year.

China’s central bank, the People’s Bank of China (PBOC), made an unexpected move with the latest rate cut. Industry experts have said it is trying to revive China’s struggling economy. Some economists believe that Chinese authorities are trying to do this through a ‘widening policy divergence’ with other central banks that are still in the throes of aggressively hiking rates.

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rate cut

Many surprised by rate cut

The central bank announced a rate cut of 10 basis points on the equivalent of $59.33 billion of one-year medium-term lending facility (MLF) loans to many financial institutions. This takes the rate from 2.85% to 2.75%.

The move was unexpected based on market analysts’ predictions in a recent Reuters poll. The poll results showed that all respondents had expected the MLF rate to stay as it was, and the majority thought there would be a partial rollover.

Xing Zhaopeng, a senior China strategist at ANZ, said: “The rate cut surprises us. It should be a response to the weak credit data on Friday. The government remains cautious about growth and will not let go.”

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Some think that the move to cut rates is a means of preparation for future inflationary pressures. Frances Cheung, a rates strategist at OCBC Bank, said: “Now with hindsight, today’s 10-bp cut may be seen as ‘front-loading’ before the policy room gets narrower going forward as the PBOC sees structural inflation pressure.”

withdrawn cash

Withdrawing cash from the banking system

It was also revealed that the central bank had withdrawn cash from the banking system to revive the demand for credit. With the economy still reeling from the impact of the Covid-19 pandemic, this is one of the steps the Bank has taken to support the sluggish economy.

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Data shows that new lending from banks in China last month fell to a lower level than expected, and there was a slowdown in broad credit growth. This has been attributed to various factors, including increased concerns over Covid, worries about employment, and the ongoing property crisis. These factors have made both businesses and consumers more cautious about taking on more debt.