China Cuts Several Major Interest Rates To Support Fragile Economy

• China surprised markets by cutting major short and long-term interest rates on Monday, its first such broad move since August last year, signaling intent to boost growth in the world's second-largest economy just days after a Communist Party leadership meeting.
• The cuts to the central bank's key short-term policy rate, its market operations rates and benchmark bank lending rates came after China reported weaker-than-expected second-quarter economic data last week and its top leaders met for a plenum that occurs roughly every five years.
• The country is verging on deflation and faces a prolonged property crisis, surging debt and weak consumer and business sentiment. Trade tensions are also flaring, as global leaders grow increasingly wary of China's export dominance.
• "The cut today is an unexpected move, likely due to the sharp slowdown in growth momentum in the second quarter as well as the call for 'achieving this year's growth target' by the third plenum," said Larry Hu, chief China economist at Macquarie.
• Additionally, the People's Bank of China (PBOC) said on Monday it would cut the seven-day reverse repo rate to 1.7% from 1.8% and would also improve the mechanism of open market operations.
• Minutes later, China cut benchmark lending rates by the same margin at the monthly fixing. The one-year loan prime rate (LPR) was lowered to 3.35% from 3.45% previously, while the five-year LPR was reduced to 3.85% from 3.95%. That was the first cut to the rate since August 2023.
• Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, said that growing expectations for the Federal Reserve to start cutting interest rates also gave the PBOC room to ease its policy, given the pressure the yuan has been under because of a wide yield gap with the dollar.

(Source: Reuters)