China Cuts 14-Day Reverse Repo Rate, Injects Liquidity As Economy Slows Down

Typically, China uses 14-day repos to facilitate the banking system manage the long holidays and the last time it did the same was ahead of a spring break in February

The People’s Bank of China (PBOC) revised the policy rate and issued another cut as the domestic economy slows down. The central bank on Monday reduced the 14-day reverse repurchase rate to 1.85 per cent from the earlier rate of 1.95 per cent.

In order to inject some liquidity into the banking system, the central bank infused 74.5 billion yuan, reported Reuters. The central bank further poured in 14-day cash into the system for the first time in months and at a lower interest rate. This indicated the bank’s aim to relax monetary conditions in the economy. 

The infusion from the central bank comes days ahead of the National Day holidays scheduled to start October 1, 2024. The rate cut align the 14-day repo rate with the shorter 7-day repo rate which was slashed in July.

Typically, China uses 14-day repos to facilitate the banking system manage the long holidays and the last time it did the same was ahead of a spring break in February.

Explaining what the rate cut means for China, the report quoted Zhang Zhiwei, Chief Economist, Pinpoint Asset Management, and said, “I wouldn't take this rate cut as a signal that PBOC loosened monetary policy further. Nonetheless, I do expect PBOC will cut 7-day repo rate as well as the reserve requirement ratio in the coming months. There is a press conference tomorrow when the financial regulators will shed light on their policy stance.”

Notably, the Chinese economy is dealing with deflationary pressures and is finding it difficult to grow even as it initiated several policy measures meant to enhance domestic spending. The last time the PBOC decided to cut short and long-term benchmark lending rates was in July.