China’s central bank on Tuesday made a surprise cut to one of its key lending rates in a bid to shore up sputtering growth in the world’s second largest economy.
The cut to the 7-day reverse repo rate — the first since August last year — will boost liquidity in the banking system and make short term loans cheaper. The rate will drop to 1.9% from 2%, according to the People’s Bank of China.
It is likely to be followed by similar reductions to a medium-term lending rate, and the benchmark Loan Prime Rate on Thursday and next Tuesday respectively, given that all three rates typically move in tandem, they added. The last time China slashed its LPR was also in August last year. Deflationary risks are hanging over the economy. The Chinese producer price index fell 4.6% in May, the biggest decline in seven years, according to government statistics released last week. The consumer price index edged up 0.2% in May from a year ago. In April, the CPI increased by just 0.1%.
The country’s official manufacturing PMI, a gauge of factory activity among big, state-owned firms, slid further into contraction territory in May.
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