Wednesday, February 19, 2020

China cuts key rate 10 bps in 4th cut since August 2019

     China's central bank lowered its new policy rate by 10 basis points to 4.05 percent, as expected and signaled through recent policy moves, its fourth cut in the 1-year Loan Prime Rate (LPR) since August 2019.
     The 5-year LPR, used as a benchmark to price mortgages, was cut 5 basis points to 4.75 percent, according to a brief statement on its website.
      Since August last year, when People's Bank of China (PBOC) designated LPR as its new benchmark lending rate, it has been cut by an effective 30 basis points.
     Although PBOC cut its key rate today, it did not conduct any reverse repo operations for the second day in a row, adding "liquidity is reasonable and adequate in the current banking system."
     On Feb. 19 PBOC said short-term liquidity that had been injected into the market after the Spring Festival - this year on Jan. 25 - had been soaked up with the maturing of reverse repos.
     China's central bank, along with the government, have been tackling the outbreak of the coronavirus, or COVID-19 as it is officially called, since Feb. 4 when PBOC first began injecting liquidity into the banking system and cutting rates on its short-term reverse repurchase facilities to support economic activity that has been hit hard by quarantines and shutdowns of major parts of the economy.
     Initially PBOC injected 1.2 trillion through 7-day and 14-day reverse repo operations at a rate that was 10 basis point below the previous rate from November 2019.
     Then PBOC launched a 300 billion yuan lending program to provide low-cost loans to companies involved in fighting and affected by the virus, with the government subsidizing half of companies' interest payments to ensure actual financing costs of less than 1.6 percent.
     On Monday PBOC lowered its 1-year medium-term-lending (MLF) lending facility by the same 10 basis points to 3.15 percent, foreshadowing today's cut in LPR.
     In August 2019, when PBOC designated LPR it as its new benchmark lending rate, it also rejigged its system for deriving LPR and set is as a spread to MLF.
     Days after announcing its new method for calculating LPR last year, PBOC set it at 4.25 percent, 6 basis points below the old LPR and 10 points below the previous benchmark lending rate of 4.35 percent.
     LPR was cut a further 5 basis points in September 2019 and then another 5 points in November, a few weeks after the MLF rate also was cut 5 points.
     PBOC announces LPR on the 20th of each month and it was then maintained in both December and January when the MLF rate was also maintained.
     PBOC has effectively lowered its policy rate by 30 basis points since August 2019 while LPR has technically been lowered by 26 points.



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