Chinese Yuan Mixed As PBoC Unexpectedly Slashes Reverse Repo Rate

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The Chinese yuan is mixed against multiple currency competitors to start the trading week. The People’s Bank of China (PBoC) joined the tidal wave of central bank actions on Monday after it unexpectedly cut the rate on its reverse repurchase agreement by the most since 2015. The nation is using every monetary and fiscal tool at its disposal to successfully reboot the world’s second-largest economy, though some experts warn that they may not be enough to combat the second wave of the COVID-19 outbreak.

The central bank slashed the interest rate on its seven-day reverse repo agreement by 20 basis points from 2.40% to 2.20%. The move is expected to inject $7.1 billion into the banking system. This is the third cut in the seven-day rate in five months. The PBoC did not explain the reason for the measure in its announcement on the central bank website. But experts say that officials are unleashing every monetary easing component to relieve pressure on the economy that is trying to return to normal.

Ma Jun, a central bank adviser, told reporters that China has plenty of room for monetary policy maneuvering. All actions the PBoC is taking, Ma says, is in consideration of the private sector, the global pandemic, and the deteriorating international economy.

In a separate statement, the PBoC urged central banks worldwide to improve coordination of global macro policies.

Although the central bank has not mirrored the easing mechanisms as its peers, the PBoC has still pulled the trigger on rate cuts, a reduction in the reserve requirement ratio (RRR), and multi-billion-dollar liquidity pumps. As Beijing raises its fiscal budget deficit to fund stimulus efforts, analysts believe further rate cuts will occur.

David Qu, Bloomberg economist, wrote:

“We expect the authorities to urge banks to expand lending, particularly to smaller and private companies. To achieve this, more liquidity will be injected by the PBOC via both broad-based and targeted methods, such as reductions in the required reserve ratio and offering liquidity via targeted MLFs.”

The consensus is that China’s economy will contract by as much as 11% in the first quarter. But the second quarter will determine if the government’s actions will be enough to bolster the gross domestic product (GDP). President Xi Jinping and his administration want nothing less than 5% GDP growth during the April-to-June period.

The USD/CNY currency pair edged up 0.05% to 7.1003, from an opening of 7.0964, at 16:51 GMT on Monday. The EUR/CNY tumbled 0.89% to 7.8206, from an opening of 7.8908.

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