China cuts medium-term borrowing costs to record low in fight against pandemic

SHANGHAI (REUTERS) – China’s central bank on Wednesday (April 15) 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.

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 7-day reverse repo rate in late March.

And 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.

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.

The PBOC said in a statement that it was injecting 100 billion yuan (S$20 billion) through the liquidity tool.

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.

Another 267.4 billion yuan worth of targeted medium-term lending facility loans are set to expire on April 24, with many traders expecting the central bank will them roll over and cut the interest rate accordingly.

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