Mar 31, 2020 (China Knowledge) - Yesterday, People's Bank of China (PBOC) resumed the reverse repurchase (repo) operation by launching a 7-day reverse repo of RMB 50 billion, reducing its interest rate 20 basis points to 2.2% from 2.4%. Previously, the central bank did not carry out such operations for 29 consecutive working days.
This is another cut after the reverse repo rate was lowered in early February, twice as big as the previous one. Followed the trajectory of February's reverse repo rate, Medium-term Lending Facility (MLF) and Loan Prime Rate (LPR), MLF and LPR are expected to be further lowered by mid-April.
Last week, the meeting of the country’s highest policy-making body of the central committee political bureau put forward a package of macro measures. This indicates the recent fiscal and monetary policy could result in expansion of fiscal deficit and issue of special bonds. A new round of banks’ reserve requirement ratio and interest rate cut is imminent. At the same time, the beginning of expansionary monetary policy will surface to support its financial markets.
With the release of economic data of the first quarter this year, fiscal and monetary policy is expected to be at full throttle, and step-up policy adjustments will aim at shoring up the economy.
China still has ample room for the operation of its monetary policy tools. The central bank has maintained its composure and flexibility when implementing its tools, and has not used up all the "bullets" at one go.
Though the central bank cut its reverse repo rate yesterday, China is probably the only major economy in the world that is still equipped with formidable and effective monetary policy.
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