China’s yuan weakens after the central bank cuts a key short-term rate

The People’s Bank of China on Tuesday cut a key short-term borrowing rate as it deals with disappointing economic data in the country after a Covid-19 reopening failed to gain momentum.

The PBOC cut its seven-day reverse repurchase rate by 10 basis points from 2% to 1.9%, according to a central bank release, injecting 2 billion Chinese yuan ($279.97 million) through its seven-day repos. A repurchase agreement (repo) is a type of short-term borrowing rate.

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This is the central bank’s first such move since August and follows the nation’s largest banks cutting deposit rates last week, signaling that further monetary easing lies ahead.

The move comes ahead of the PBOC’s medium-lending facility interest rate decision, which is expected to be released on Thursday. Meanwhile, the bank’s loan prime rate is scheduled for release on June 20.

The onshore Chinese yuan weakened 0.25% to 7.1618 against the U.S. dollar shortly after the move Tuesday and hovered at its weakest levels since November.

“Now we are going to see the Chinese [monetary] policy will become more supportive,” Atlantis’ Chief Investment Officer Yang Liu told CNBC’s “Street Signs Asia.”

“Basically what the Chinese government is [expected] to do [is] to try very hard to prop up the domestic consumption, especially in the private sector,” she said.

UBS Global Wealth Management also expects further policy easing ahead, it said in its June outlook report. “We believe monetary policy will continue to focus on keeping liquidity ample and credit growth steady,” it said, predicting the central bank to deliver one to two “modest” reserve requirement ratio cuts or cuts in the medium-lending facility rate by 5 to 10 basis points in the second half of this year.

“Larger steps, however, could worsen FX pressure, which policymakers want to avoid, and come with diminishing returns if not accompanied by demand stimulus,” it said.