The main rate of the People’s Bank of China, known as the 7-day reverse repo rate, unexpectedly decreased by 10 basis points to 1.7% last night. According to currency strategist Folkmar Baur from Commerzbank, this rate cut is the first one since August last year.
Positive market response expected
Compared to other currencies, China’s capital controls and unique economic characteristics make the impact of credit and monetary policy on the currency less significant. However, the reduction in the benchmark rate carries a particular signaling effect.
Expectations for short-term impulses from the recently concluded Third Plenum were low. This meeting mainly focused on long-term events and reforms. While the initial communique was somewhat underwhelming, the more detailed documents released over the weekend present a more optimistic outlook regarding constructive reforms, especially in fiscal policy.
The signal of support from the People’s Bank of China carries great importance in the near future, considering the weak growth indicators in the second quarter. The upcoming official meeting of the Politburo also heightens expectations for additional support measures. It is anticipated that the market will contemplate more negative scenarios of a significant growth slowdown, ultimately offering support to the yuan.