People's Bank of China surprises markets with steepest interest rate cut in 3 years

In a surprise move, China's central bank cut interest rates by the largest amount in three years.

It's the second interest rate cut in three months, opening the door for a cut to the main LPR borrowing rate at next week's policy meeting. 

The People's Bank of China already cut interest rates in June to support the economy but weak data continues to pour out.

Surprise Decision

China's central banks cut medium-term one-year borrowing costs by 15 basis points from 2.65% to 2.5%, the largest cut since 2020.

In a survey conducted by Reuters last week, nearly 77% of experts expected no change in interest rates by the People's Bank of China, while 33% expected a marginal cut.

Monitors attribute the latest interest rate cut to the increasing risks of economic recession in July and weaker credit growth.

Yuan

A cut in Chinese interest rates widens the gap with other major global central banks and their monetary policies, and puts heavy pressure on the yuan.

It's expected the yuan will mark fresh losses in upcoming days, especially if China's central bank went ahead of in cutting the main LPR interest rate next week.

Disappointing Data

The decision came ahead of disappointing Chinese data for July.

The data showed unemployment rose unexpectedly while consumer spending, industrial production, and investments, were less than expected. 

China's statistical office said local demand remains week so far with recovery requiring more support by authorities.