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Economy

China cuts rates on midterm loans for first time since April 2020

Central bank's move to lower costs for borrowers surprises market

The People's Bank of China in Beijing. A significant number of traders and analysts expected no change to the medium-term rates.   © Reuters

SHANGHAI (Reuters) -- China's central bank on Monday unexpectedly cut the borrowing costs of its medium-term loans for the first time since April 2020, while some market analysts expect more policy easing this year to cushion an economic slowdown.

The People's Bank of China (PBOC) said it was lowering the interest rate on 700 billion yuan ($110.19 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85% from 2.95% in previous operations.

Thirty-four out of the 48 traders and analysts, or 70% of all participants, polled by Reuters last week predicted no change to the MLF rates in January, with the rest betting on a rate cut.

The world's second-largest economy has shown signs of slowing after a rapid rebound from the COVID-19 slump, with concerns about the financial health of property developers and the rapid spread of the Omicron coronavirus variant clouding the outlook.

"The PBOC's decision to ease early in January suggested that economic downward pressure intensified at end-2021 and room for improvements in the first quarter of this year is not huge," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Cheung expects that the PBOC could deliver more easing measures this year than previously expected by market analysts.

Such expectations were also reflected in the bond market, with China's 10-year treasury futures rising to their highest level since June 2020 and the yield on China's benchmark 10-year government bonds falling more than 2 basis points in early trade.

Market analysts said the size of the rate cut and the timing were a big surprise, and they believe further monetary stimulus could follow.

"The 1Y LPR signaled that another rate cut was coming," said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong.

"However, the 10 bps cut was larger than expected, suggesting that the authorities have become more preoccupied about weakness in the economy," he said, adding he also expects an additional 100 bps reduction to banks' reserve requirement ratio (RRR) this year.

With 500 billion yuan worth of MLF loans maturing on Monday, the operation resulted in a net injection of 200 billion yuans into the banking system.

The central bank also lowered the borrowing costs of seven-day reverse repurchase agreements, or repos, by the same margin to 2.10% from 2.20%, when it offered another 100 billion yuan worth of reverse repos into the banking system.

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