Economy

China Central Bank Lowers Medium-Term Loan Rate, Reports Reuters

SHANGHAI – On Wednesday, China’s central bank reduced the interest rate on its medium-term loans to financial institutions, reflecting a broader effort to ease monetary policy aimed at revitalizing a struggling economy.

The People’s Bank of China (PBOC) announced that it decreased the rate on 300 billion yuan (approximately $42.66 billion) of one-year medium-term lending facility (MLF) loans from 2.30% to 2.00%.

In the recent operation, the bid rates varied from 1.90% to 2.30%, and the total outstanding MLF loans have reached 6.878 trillion yuan, according to the PBOC’s online statement.

A financial news outlet, affiliated with the PBOC, noted that revealing the bid rates for the first time illustrates the varied funding needs among different financial institutions, aligning with the central bank’s goal of enhancing transparency in its monetary policy.

The results of the MLF auction were shared separately from the open market operations, underscoring their distinction from the seven-day reverse repo rate, which currently acts as the main policy rate. This change allows the MLF to be positioned as a mid- to long-term liquidity tool.

Additionally, this month, 591 billion yuan worth of MLF loans reached maturity.

On Tuesday, the government announced its largest stimulus initiative since the pandemic, aimed at lifting the economy out of its deflationary state and moving closer to the growth targets set by the authorities.

Frances Cheung, head of FX and rates strategy at OCBC Bank, mentioned that the partial rollover of loans was not unexpected, especially with a planned cut to the reserve requirement ratio (RRR). This reduction entails a 50-basis-point decrease in the amount of cash banks must maintain as reserves. Looking ahead, Cheung noted the potential for another RRR cut by year-end due to significant MLF maturities projected in the fourth quarter.

Cheung also observed that the PBOC’s disclosure of the highest and lowest bids indicated a move towards allowing demand to drive the facility, thereby diminishing the MLF rate’s role as a guiding policy measure.

Additionally, on the same day, the PBOC injected 196.5 billion yuan through 14-day reverse repos, keeping the interest rate steady at 1.85% from the previous operation.

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