China Expected to Lower Policy and Lending Rates After U.S. Interest Rate Cut

A Reuters poll suggests that China will likely lower its central policy and lending rates on September 20, following the U.S. Federal Reserve's significant interest rate cut. This anticipated move aims to stimulate China’s slowing economy and offset recent yuan declines amid global economic uncertainties.

Analysts Expect China to Lower Key Lending Rates Despite Challenges from a Weakening Yuan

According to a Reuters poll, the Federal Reserve's substantial interest rate reduction, which mitigated some of the risks associated with significant yuan declines, is widely anticipated to reduce China's central policy and benchmark lending rates on September 20.

Over the past few years, Beijing's efforts to loosen policy have been significantly hindered by a weakening Chinese yuan and monetary policy divergence.

Nevertheless, analysts and speculators believe Beijing has more flexibility in monetary policy. This week, the U.S. central bank initiated its monetary easing cycle with a larger-than-average half-percentage-point reduction.

The People's Bank of China (PBOC) calculates the loan prime rate (LPR) each month after 20 designated commercial banks submit proposed rates. The LPR is typically charged to the banks' most valuable clients.

In a recent survey of 39 market observers conducted by Reuters, 27 respondents, or 69%, anticipated that both the one-year and five-year LPRs would be reduced.

Two of the remaining 12 respondents anticipated a reduction in the five-year LPR, while the remaining 10 predicted no change in either rate.

Additionally, market participants anticipated that the PBOC would reduce the financing cost of the short-term liquidity tool before reducing LPRs, as the seven-day reverse repo rate has become the central bank's primary policy rate.

China’s Surprise Rate Cuts Signal Commitment to Boost Growth Amid Slowing Economic Activity

In July, China surprised markets by reducing significant short and long-term interest rates, its first such broad move in nearly a year. According to Yahoo Finance, this action indicated that policymakers were committed to bolstering economic growth.

According to market observers, the August economic data included unexpectedly negative credit lending and activity indicators, underscoring the necessity of additional stimulus measures to support the economy.

Due to slowing Chinese economic activity, global brokerages have reduced their 2024 China growth forecasts to below the government's official objective of approximately 5%.

State media reported last week that President Xi Jinping encouraged authorities to strive to achieve the country's annual economic and social development objectives. This comes amid expectations that additional measures are required to support a faltering economic recovery.