China unexpectedly cuts one-year policy rate by most since 2020

China unexpectedly cuts one-year policy rate by most since 2020

The People’s Bank of China unexpectedly lowered the rate on its one-year policy loans by the most since April 2020, following a surprise reduction to a key short-term rate to boost slowing economic activity.

The central bank lowered the rate of medium-term lending facility by 20 basis points to 2.3%, according to a statement Thursday. The rate was last lowered in August 2023 and the cut followed the PBOC’s trim of the seven-day reserve repo rate by 10 basis points on Monday. The monetary authority has recently downplayed the MLF rate in favor of the short-term rate to guide markets in a way more similar to global peers.

“It is basically a coordinated effort across all the key interest rates to ease monetary policy,” said Lynn Song, Greater China chief economist at ING Bank. “It’s worth highlighting this round of easing kicked off with the 7-day RR, which may be a signal of its future role as the main policy rate.”

The announcement was unexpected because the PBOC typically conducts MLF in the middle of each month. The PBOC provided 200 billion yuan of MLF on Thursday, after it drained a net 3 billion yuan of cash via the funds earlier this month.

China’s economic growth came in worse than expected in the second quarter, as faltering consumer spending more than offset an export boom.