April 24, 2020 / 2:00 AM / a month ago

China cuts TMLF interest rate by 20 basis points in latest economy support step

SHANGHAI (Reuters) - China’s central bank cut the interest rate on its targeted medium-term lending facility (TMLF) on Friday, following similar reductions to borrowing costs on other liquidity tools in the past few weeks to support the economy.

FILE PHOTO: A man wearing a mask walks past the headquarters of the People's Bank of China, the central bank, in Beijing, China, as the country is hit by an outbreak of the new coronavirus, February 3, 2020. REUTERS/Jason Lee/File Photo

The People’s Bank of China (PBOC) said it lowered the one-year interest rate on the TMLF by 20 basis points to 2.95% from 3.15% in the previous operation.

In the same statement, the central bank said it injected 56.1 billion yuan ($7.93 billion) into the economy on Friday, when a batch of 267.4 billion yuan of TMLF loans was due to expire.

TMLF loans are aimed at struggling areas of the economy. The gap between the one-year MLF CNMLF1YRRP=PBOC and TMLF was effectively wiped out following Friday’s rate move. The gap was kept at 10 basis points in the previous operation in January. The one-year MLF rate now also stands at 2.95%.

“The role of TMLF as a low-cost alternative to MLF is diminishing, as there are various measures providing cheaper funding already,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore.

“While the rates are the same, the recipients can be different, hence these are still two facilities,” she said.

MLF, one of the main tools of the central bank in flexibly managing longer-term liquidity in the banking system, is loosely pegged to the lending benchmark loan prime rate (LPR).

China has cut the interest rate on one-year MLF twice this year to the lowest on record, guiding the LPR lower for the broad economy given that most new and outstanding loans are now priced against the LPR.

China has greatly stepped up easing efforts since the outbreak of the new coronavirus which has caused massive business disruption and lead to the world’s second-largest economy posting its first quarterly contraction for the first time on record.

Though analysts expect a stimulus package carrying more proactive monetary and fiscal measures soon to cushion the economic slowdown, many believe the authorities would prefer targeted moves for the time being and refrain from building up debt - a lesson from the previous round of easing in 2015.

Julian Evans-Pritchard, senior China economist at Capital Economics, said the PBOC might not seek to push down interbank rates any further, as they are already near record lows.

“But with the economy struggling to get back on track and external headwinds intensifying, we still anticipate additional easing measures in the coming months,” he said in client note.

China’s economy shrank 6.8% in January-March from the same period a year earlier, the first such decline since at least 1992 when quarterly records were first published.

A recent Reuters poll suggested China’s economy will slowly recover, but analysts have said a recession is likely if conditions worsen again due to the pandemic.

TMLF, a liquidity tool introduced by the PBOC in December 2018 and deployed in January last year, is targeted at directly funding parts of the economy that are still struggling.

It differs to other more sweeping system-wide cash infusions used over the past year when there were worries of a sharper slowdown.

The TMLF will mature in one year but the banks will be allowed to roll it over for two more years.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Muralikumar Anantharaman and Christopher Cushing

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