At roughly the same time that China's Xi Jinping was vowing to "open doors wider" to foreign firms, something he has done on countless times before but this time may really mean it as China desperately needs foreign capital now that its current account is finally set to drop below zero, the PBOC - which had stubbornly refused to follow the Fed's rate cuts - unexpectedly cut the 1-year Medium-term Lending Facility (MLF) rate by a modest 5bp, the first such cut since February 2016...
... a move that as Goldman put it "surprised the market" even though the impact on liquidity "is roughly neutral", which one would expect for such a modest cut.
SocGen - Notes - Policy - Interest - Rate
As SocGen notes, this was the very first policy (interest) rate cut in this cycle. The cut, though small in magnitude, sends several big messages:
The cut prompted speculation that a cut could soon follow for China's "new Libor" rate, i.e., the loan prime rate (LPR) which has been the major focus of the PBOC, even though, as Goldman concedes, short-term rates may have limited further downside in the near term.
Observations - Today - Surprise - Cut - Goldman
Some more observations on today's surprise cut via Goldman:
The PBOC lowered the 1-year MLF interest rate by a modest 5bp (the last time the PBOC adjusted MLF rates was in April 2018, raising the rates by 5bp). This actually surprised the market, as PBOC did not conduct targeted MLF in Q3 for the first time this year (typically it happens in the following month after each quarter ends) and left MLF rates unchanged recently.
Rate - Cut - Weeks - PBOC - Repo
The rate cut followed two weeks after the PBOC's largest 3-day net repo injection since January.
However, as we noted in "China Just Injected The Most Liquidity Since January... And It's Not Enough", the injection failed to put a dent on repo rates, which had been trending...
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