The People’s Bank of China (PBOC) unexpectedly lowered the rate on its one-year policy loans by the most since April 2020, days after cutting a key short-term rate, in a sign of greater support for the slowing economy.

The central bank lowered the rate of the medium-term lending facility (MLF) by 20 basis points to 2.3%, according to a statement on Thursday, the first reduction in almost a year. The cut followed the PBOC’s trim of the seven-day reserve repo rate by 10 basis points on Monday. The monetary authority has recently downplayed the MLF rate in favour of the short-term rate to guide markets in a way more similar to global peers.

“It is basically a coordinated effort across all the key interest rates to ease monetary policy,” said Lynn Song, the Greater China chief economist at ING Bank. “It’s worth highlighting this round of easing kicked off with the seven-day reserve repo rate, which may be a signal of its future role as the main policy rate.”

China’s bond futures edged higher with the yuan after the cut, though the moves were modest. 

The PBOC’s string of rate cuts underscores authorities’ growing urgency to support growth, which came in worse than expected in the second quarter, as faltering consumer spending more than offset an export boom. The central bank had refrained from cutting rates since late last year, as it sought to keep the yuan exchange rate stable.

The announcement was unexpected because the PBOC typically conducts MLF operations in the middle of each month, and had already drained a net three billion yuan of cash via the funds earlier this month when a batch of them matured. The PBOC provided 200 billion yuan of MLF on Thursday.

The cut came after China’s largest state banks lowered rates on some deposit products to ease pressure on profit margins, following their earlier cuts to the benchmark lending rates, known as the loan prime rates.

Banks have had little appetite for the MLF funds in recent months, as a decline in market rates meant it became cheaper for them to borrow from each other than from the PBOC via the programme. A bigger cut to the MLF rate to bring it closer to market borrowing costs can help address this issue, economists have said.

The rate on one-year negotiable certificates of deposit issued by AAA-rated banks, a gauge of short-term interbank borrowing costs, is now 1.9%, cheaper than the MLF funds.

“The MLF was done when there's no near-term maturity, showing that the PBOC intends to send the easing signal,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp (OCBC). “The cut in the MLF rate is of a bigger magnitude than the cut in the seven-day open-market-operation reverse repo rate, primarily because the MLF rate was at an elevated level to start with.”

  - Bloomberg