Chinese Yuan Slides As PBOC Unexpectedly Cuts Short-Term Funding Rate

The Chinese yuan is sliding against multiple currency pairs to start the trading week. The central bank’s decision to unexpectedly cut its short-term funding interest rate is playing a huge role in global financial markets on Monday. Will this be enough to withstand the economic storm clouds that have been gathering in the world’s second-largest economy over the last 18 months?

Investors were celebrating on Monday after the People’s Bank of China (PBoC) announced that it has lowered the interest rate on its regular reverse repurchasing open marketing operations. The PBoC confirmed on its website that the seven-day short-term funding rate would fall from 2.55% to 2.5%.
This is the first time the PBoC has cut its short-term funding rate since October 2015. The purpose behind the move is to increase market confidence, spur economic growth, and inject the system with billions of dollars in liquidity. The PBoC estimates that the drop in the repo rate will add more than $25 billion to the monetary system through its open market operations.
Earlier this month, the PBoC decreased the interest rate on the one-year medium-term lending facility from 3.3% to 3.25%.
In a recent quarterly monetary policy statement, PBoC officials agreed that these moves are necessary to prevent “a divergence of inflation expectations.” The central bank added that it may institute additional monetary policy adjustments based on economic growth and price levels.
Analysts now anticipate that the PBoC will cut its new benchmark loan prime rate (LPR). The rate on the one-year fixed rate sits at 4.2% and the five-year is at 4.85%. Many mortgage lenders calculate their rates based on the LPR. Should the central bank trim the LPR, then it could add funds to various areas of the economy that are short on credit.
Experts also think this will certainly raise the likelihood of another cut to the reserve requirement ratio (RRR) before the end of the year. The RRR – the number of reserves that financial institutions are required to hold – has already been slashed several times this year.
The USD/CNY currency pair rose 0.24% to 7.0252, from an opening of 7.0084 at 14:27 GMT on Monday. The EUR/CNY advanced 0.39% to 7.7780, from an opening of 7.7474.

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