SHANGHAI, April 15 — China’s central bank on Wednesday cut the interest rate on its medium-term funding for financial institutions to the lowest level on record, in an attempt to combat the economic fallout from the coronavirus health crisis.

The move should pave the way for a similar reduction to the country’s benchmark loan prime rate (LPR), which will be announced on the 20th, to lower financing costs for companies hit by pandemic.

The People’s Bank of China (PBOC) said it was lowering the one-year medium-term lending facility (MLF) loans to financial institutions to 2.95 per cent, the lowest level since the liquidity tool was introduced in September 2014, down 20 basis point from 3.15 per cent previously.

In a statement, the central bank said that it was injecting 100 billion yuan (US$14.19 billion) through the liquidity tool.

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The cut came largely in line with market expectations, as economists believe the central bank would keep its yield curve steady by lowering the MLF rate by the same margin as the cut to the seven-day reverse repo rate in late March.

“In general, the one-year MLF is still close to 3 per cent, the highest among all major economies, which offers the PBOC space for further easing if things get worse,” Yun Xiong, portfolio manager at Green Harmony Capital in Hong Kong.

Some market participants believe the PBOC’s dual easing move on Wednesday — lowering the medium-term borrowing cost on the same day when the first phase of a targeted reserve requirement ratio (RRR) cut comes into effect — is a sign the authorities are stepping up monetary support as markets brace for grim economic data.

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China is due to release its first quarter GDP data and activity indicators on Friday. Analysts are forecasting the world’s second-largest economy to suffer a 6.5 per cent year-on-year contraction in first quarter, which would mark the first quarterly contraction in more than 30 years.

China’s central bank said earlier in the month it was cutting the amount of cash that small banks must hold as reserves to shore up the economy, which has been badly jolted by the coronavirus crisis.

The first phase of the cut came into effect on Wednesday, freeing up around 200 billion yuan (US$28.37 billion) of long-term funds, the PBOC said in a statement on Wednesday, although it did not comment on the MLF rate cut.

More easing expected

“With external headwinds mounting and domestic demand struggling to fully recover from the Covid-19 outbreak even as most firms have resumed operations, the PBOC appears to be ramping up the pace of monetary easing,” Julian Evans-Pritchard, senior China economist at Capital Economics said in a note.

“But more will be needed to ensure the economy gets back on track,” he said, and forecast another 100 basis points of additional rate reductions this year.

A lower MLF rate should incentivise commercial banks to reduce the lending benchmark, as the medium-term lending cost now serves as a guide for the LPR.

“We expect an LPR cut, but the magnitude does not necessarily match these 20-basis-point cuts,” said Frances Cheung, head of macro strategy in Asia at Westpac in Singapore, predicting a 5-10 basis points cut to the LPR.

Global central banks have rolled out unprecedented stimulus measures in the past few weeks, cutting rates sharply and injecting trillions of dollars to backstop their economies as many countries have been put under tight lockdowns to contain the pandemic.

However some analysts questioned whether monetary easing may be reaching its limits and doubt if it could provide a sufficient boost to demand needed to lift the economy.

“The problem is not the level of rates at the current juncture,” said Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis in Hong Kong.

“They need to prod (people) to consume,” she said, advocating the expansion of a consumption voucher program already begun at the local level in the city of Hangzhou.

“They are really under pressure not to cut any further, because insurance companies and banks are really worried about their margins,” she said.

There is no MLF loans due to expire on the day, though a batch of 200 billion yuan worth of such loans is maturing on Friday. Markets are usually primed for PBOC to take action when the outstanding loans expire. — Reuters