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Repo rate lowered to ease liquidity
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CHINA’S central bank, for the second time in a week, moved to ease liquidity conditions and boost the economy.
The People’s Bank of China yesterday cut the interest rate it pays on repurchase agreements to 3.5 percent, the lowest since January 2011, as it sold 10 billion yuan (US$1.63 billion) 14-day bonds to banks. They sold at 3.7 percent since July.
The rate is considered as a reference for risk-free rates, and the move is expected to lower funding costs and encourage companies to issue bonds.
Economists consider the move a de facto interest rate cut, albeit at a much smaller scale.
“This is a reaction against shrinking lending and weaker economic data,” said Lu Zhengwei, chief economist at the Industrial Bank. “The move could lower interest rate on the money and bond markets, but other credit financing channels and demands of small businesses still depend on policy rate. More adjustments still need to be made.”
Barclays Plc said the move was a “strong signal of a start of a rate-cutting cycle,” as the central bank finds greater need to guide interest rates lower to support economic growth.
The seven-day repo rate, which measures the funding costs in the interbank market, was unchanged at 3.38 percent yesterday, a weighted average compiled by the National Interbank Funding Center showed.
On Tuesday, the central bank reportedly injected 500 billion yuan into the five largest state-owned banks through a three-month agreement called the Standing Lending Facility.
The SLF is one of the regular liquidity management tools that the PBOC uses. It was initiated in 2013 and usually requires high-quality assets as collateral. The Agricultural Bank of China and the Bank of Communications were the first to acquire the money, traders said.
When fully executed, the liquidity released into the market will be equal to the effect of cutting reserve requirement ratio by 0.5 percentage points, but SLFs are carried out at a more targeted and controlled manner.
Wang Tao, chief economist at UBS China, said the move meant that an across-the-board reserve requirement cut was highly unlikely this year as the monetary authority remains reluctant to commit to longer term liquidity easing and wants to avoid sending excessively “strong signals.”
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