People’s Bank of China reduces 7-day reverse repo rate by 20 basis points

People’s Bank of China reduces 7-day reverse repo rate by 20 basis points

  • China reduces 7-day reverse repo rate from 2.40% to 2.20% on Monday.
  • Capital Economics says further easing is required for the economy to return to pre-virus trend.
  • China’s Central Bank injected the money markets with £5.6 billion on Monday.

Amidst the rising pressure on the economy due to the Coronavirus pandemic, China’s Central Bank took a surprise decision of reducing reverse repurchase agreements rate by 20 basis points. The rate cut marked the largest in around 5 years.

According to an announcement via its website, the People’s Bank of China (PBOC) reduced the reverse repo rate (7-day) on Monday from 2.40% to 2.20%. An explanation for the move was not given on the website.

Central Bank Adviser Says China Has Sufficient Room For Monetary Policy Adjustments

Addressing to the state media, central bank adviser Ma Jun commented on Monday that China has sufficient room to make further adjustments to the monetary policy. The Monday’s decision, he added, was in consideration of the global pandemic, businesses slowly resuming operations in China, and the rising uncertainty in the foreign economic environment.

Monday’s rate cut marked the 3rd since November 2019. Chief Economist Yan Se of Beijing-based Founder Securities commented on the rate cut and reiterated that the move highlights China’s commitment towards winning its battle against the pandemic and stabilizing the financial markets again, as the country pledged in G20 meeting last week. He further added:

“China was the only major economy that had not yet implemented large-scale easing measures.”

Multiple economies from across the globe including the U.S, UK, Canada, and Australia have recently resorted to massive rate cuts and fiscal measures to support the respective economies which have been brought to their knees by the rampant transmission of the flu-like virus.

Capital Economics Sees A Need For Further Easing In China’s Fiscal Policy

According to Capital Economics, however, China’s fiscal policy needs more easing for the economy to return to its trend before Coronavirus.

The G20 leaders pledged to add more than £4 trillion on Thursday to support the global economy and prevent income and job cuts as much as possible due to the Coronavirus. Earlier on Monday, China’s Central Bank also injected the money markets with £5.6 billion.

The rate cut stirred optimism in the Chinese government bond futures (10-year) with CFTM0 climbing 0.23% initially followed by a 0.1% decline later in the day.

In the forex market, the Chinese Yuan dropped to 7.1022 against the U.S dollar on Monday. The currency pair had opened at a lower 7.0890. The U.S dollar index, on the other hand, remained downbeat in the past week having dropped below the 100.00 level again. At the time of writing, the index is stabilizing around 98.94.

By Wajeeh Khan
Mr. Khan specialises in Public Health by academia but is a trader by passion. Taking up two new hobbies of writing and trading in his teen years, he is now a professional trader and news writer with over 5 years of experience in various financial markets. Khan is passionate about bringing insightful articles to his readers and hopes to add value to their portfolios.

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