China central bank adds more liquidity, cuts 14-day reverse repo rate

SHANGHAI (Reuters) - China’s central bank lowered the interest rate on 14-day reverse repurchase agreements on Wednesday, in step with a similar cut in the 7-day repo rate last month, to ease monetary conditions.

FILE PHOTO: Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee/File Photo

Traders said the move was expected as it keeps the shape of the yield curve steady while some economists noted this could flag more easing ahead as economic growth slows.

The People’s Bank of China (PBOC) said on its website that it was lowering the 14-day reverse repo rate to 2.65% from 2.70%, while keeping the 7-day rate unchanged at 2.50%.

The PBOC unexpectedly trimmed the seven-day lending rate by the same margin in November for the first time in more than four years, a signal to markets that policymakers are ready to act to prop up slowing growth.

“The PBOC will continue to pay close attention to liquidity conditions and flexibly conduct open market operations to keep the year-end liquidity steady,” the central bank said in a statement on its website, but did not provide further explanation on its rate decision.

Some market participants said the amount of fresh funds the central bank offered was beyond market expectations given liquidity was ample on Wednesday morning.

The PBOC injected a total of 200 billion yuan ($28.41 billion) into money markets through reverse bond repurchase agreements.

Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong said earlier this week that the PBOC is likely to adopt an easier monetary policy stance in 2020.

“We expect monetary policy to play a bigger role in 2020 given the limited fiscal impulse,” Liu said in a note.

“However, cuts to de facto policy rates – i.e., the medium-term lending facility (MLF) and open market operation (OMO) rates – are likely to be slow and shallow for both fundamental and technical reasons.”

Liu expects the PBOC to cut MLF rates at a very gradual pace of five basis points each time in the foreseeable future.

Reverse repos and MLFs are widely considered to be the PBOC’s main tools in flexibly managing short-term and longer-term liquidity in the banking system.

The MLF now acts as a guide for China’s new lending benchmark, the Loan Prime Rate (LPR), which is scheduled for a monthly fixing on Friday.

Markets mostly expect the LPR to remain unchanged this month though some are braced for a move downwards.

Julian Evans-Pritchard, senior China economist at Capital Economics in Singapore, said the PBOC’s rate cut may be “just enough to convince banks to make another five basis points cut this Friday to the LPR.

“We think the pace of easing will pick up next year, when we expect 50 basis points worth of cuts. While policymakers are reluctant to engineer a sharp rebound in credit growth, more easing will probably be needed just to keep credit growth broadly stable and prevent economic activity from weakening too quickly,” he said in a research note.

Editing by Jacqueline Wong