Coronavirus: China slashes bank loan rate by biggest amount in five years, joining global easing
- People’s Bank of China reduces 7-day reverse repo rate to 2.20 per cent from 2.40 per cent, the largest cut since 2015
- Move comes as analysts expect China’s economy to contract in the first quarter for the first time since 1976
China’s central bank on Monday cut the interest rate it charges on loans to banks by the biggest amount since 2015 as authorities ramp up their response to the worsening economic impact from the coronavirus pandemic.
The People’s Bank of China (PBOC) reduced the interest rate on 7-day reverse repurchase agreements to 2.2 per cent from 2.4 per cent, according to a statement from the bank on Monday. The PBOC said this wwould keep liquidity sufficient to help the real economy.
“The larger-than-usual rate cut is an expression that China is willing to join the coordinated consortium for economic stabilisation,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong. “Small and medium-sized businesses are collapsing for lack of cash flow.”
The larger-than-usual rate cut is an expression that China is willing to join the coordinated consortium for economic stabilisation
A reduction in the central bank’s main tool to adjust the price of market liquidity also signals coming reductions in its main one-year funding tool, and potentially a corresponding cut to the benchmark deposit rate. Cuts to policy rates should also be reflected in the main market benchmark of the cost of lending to companies, the loan prime rate.
“Lowering banks’ lending rates without a reduction in the cost of their liabilities will squeeze banks’ net interest margin, eroding their profitability and capital base,” said Ding Shuang, chief Greater China and North Asia economist at Standard Chartered Bank. “A benchmark deposit rate cut is necessary.”
