China cuts third key policy rate to prop up economy, while US Federal Reserve pauses hikes

People’s Bank of China lowered the interest rate on its one-year medium-term lending facility (MLF) loans to financial institutions from 2.75 to 2.65 per cent on Thursday

Overnight, the US Federal Reserve voted to hold its benchmark lending rate at between 5 and 5.25 per cent, ending a run of 10 straight increases since March 2022

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Market sentiment recently plunged amid a string of weak economic data and worries over China’s post-coronavirus prospects have held back private and foreign investors. Photo: Xinhua

Published: 9:26am, 15 Jun 2023Updated: 11:44am, 15 Jun 2023

China’s central bank on Thursday cut the interest rate on its medium-term funding for financial institutions, marking its third policy rate change in three days amid efforts to support the slowing economy through renewed monetary loosening.

The People’s Bank of China (PBOC) lowered the rate on its one-year medium-term lending facility (MLF) loans to financial institutions from 2.75 to 2.65 per cent.

In a statement, the central bank said that it injected 237 billion yuan (US$33 billion) through the liquidity tool.

Overnight, the US Federal Reserve voted to hold its benchmark lending rate at between 5 and 5.25 per cent, citing a robust job market and modest economic expansion, ending a run of 10 straight increases since March 2022.

The key takeaway is that while 10 basis point cuts won’t make much difference on their own, they reveal growing concerns among officials about the health of China’s recovery

Julian Evans-Pritchard

The monetary policy divergence has widened the gap between China and US interest rates, continuing to place pressure on China’s capital outflows.

On Tuesday, the PBOC cut the seven-day reverse repo rate from 2 to 1.9 per cent when it sold 2 billion yuan (US$280 million) of the liquidity tool, before the central bank also trimmed the rate on its standing lending facility loans.

“The PBOC has just announced a 10-basis-point cut to the one-year rate on its medium-term lending facility, a key tool for providing funding to banks. This follows Tuesday’s surprise cuts to short-term policy rates,” said Julian Evans-Pritchard, head of China economics at Capital Economics.