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Financial News: China Likely To Cut Rates Further To Calm

China Likely To Cut Rates Further To Calm Markets After Virus Outbreak

02/03/2020 - 09:54:00 (RTTNews)

(RTTNews) - China's central bank is set to cut more of its interest rates in its bid to calm markets in the backdrop of the novel coronavirus, or 2019 n-Cov, outbreak, an economist said Monday.

Economists expect more stimulus measures from the central bank and the government in coming days unless there is a rapid improvement in the situation.

The People's Bank of China on Monday lowered its seven-day reverse repo rate to 2.40 percent from 2.50 percent in an unscheduled move. The previous move in this rate was a five basis points reduction in November, the first cut since October 2015.

The central bank also cut the 14-day reverse repo rate to 2.55 percent from 2.65 percent. This rate was lowered last in December, by five basis points.

The PBoC also injected a total CNY 1.2 trillion yuan into money markets on Monday through reverse repo deals.

"While this will take some pressure off of banks and borrowers, the rate cuts are too marginal to provide a substantial offset to the drag on economic activity from the Coronavirus outbreak," Capital Economics economist Julian Evans-Pritchard said. "The upshot is that the latest PBOC cuts will allow for a larger sustained decline interbank rates in response to PBOC injections, which were stepped up today."

The economist expects the bank to follow up Moday's moves with cuts to the rate of other lending facilities, which in turn should feed through to a lower Loan Prime Rate, which is the benchmark on which new bank loans are now priced and to which interest rates on existing loans are linked.

ING economist Iris Pang said Monday's moves indicated that the PBoC is "concerned about market interest rates rising if the economy is not operating normally under the coronavirus, which would explain them pre-emptively cutting interest rates by a bigger than usual step."

The indication from no reserve requirement ratio, or RRR, cuts is also important, the economist added, saying that it suggests the central bank does not want to send the message to the market that it is going to flood it with liquidity taking interest rates down to a very low level.

The RRR was last cut on January 1 by 50 basis points after three reductions in 2019. Pang expects the Chinese government to add fiscal stimulus next to support the economy, but in a focused manner through moves such as building more hospitals and scrapping import duties and other taxes on imports of medical equipment.

The PBoC moves came as the death toll from the coronavirus, which originated in the city of Wuhan, crossed 350 and there are over 17,000 confirmed cases in China.

The disease has spread beyond China and the first death outside the country has been reported in the Philippines.

The World Health Organisation declared coronavirus as a Public Health Emergency of International Concern, or PHEIC, on January 30.

As fears over the coronavirus rise, the Chinese share markets tumbled on Monday after they reopened following the Lunar New Year holiday.

The Shanghai Composite Index was nearly 8 percent lower at closing on Monday, the biggest daily fall in over four years.

The slump came despite the central bank's measures of support.

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