China's Central Bank Surprises Markets With Second Lending Operation This Week: Fed Likely To Hold Rates Steady At July FOMC

The People’s Bank of China (PBOC) has executed an unscheduled lending operation at significantly lower rates, indicating a potential increase in monetary stimulus to support the economy.

What Happened: The PBOC conducted a medium-term lending facility (MLF) operation, issuing 200 billion yuan ($27.5 billion) in one-year loans at a rate of 2.30%, a 20 basis point decrease from the previous MLF loan, Reuters reported. This move follows the bank’s decision to cut several benchmark lending rates just days after a key leadership meeting that outlined major reforms.

The central bank also injected 235.1 billion yuan into the market through seven-day reverse repos at 1.70%. This cash injection was intended to “maintain reasonably ample month-end banking system liquidity conditions,” according to the bank’s statement.

Market analysts, including Xing Zhaopeng from ANZ, attribute the MLF rate cut to sharp declines in China’s stock markets. The Hang Seng China Enterprises index in Hong Kong fell 1.6%, reflecting concerns over deflationary pressures and weak consumer demand.

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“It shows the PBOC wants to be more accommodating to banks in lowering their medium-term funding costs,” said Gary Ng, Asia Pacific senior economist at Natixis.

“The fact that PBOC didn’t wait for the Fed to cut first indicates that the government recognizes the downward pressure on China’s economy,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management.

Why It Matters: The latest move by the PBOC comes amid a series of economic challenges facing China. Recently, Chinese stocks, including Alibaba Group Holding Limited. BABA, PDD Holdings Inc., PDD, and JD.Com, Inc. JD, saw a boost after China lowered key interest rates to stimulate the economy. This decision was driven by weak growth in the second quarter, looming deflation, and a prolonged property crisis.

Meanwhile, the U.S. Federal Reserve has also been hinting at potential rate cuts. Last week, New York Federal Reserve President John Williams suggested that a rate cut could be imminent if the recent slowdown in inflation persists. Federal Reserve Chairman Jerome Powell also noted that recent inflation data has bolstered confidence in achieving the Fed's 2% inflation target.

Furthermore, Federal Reserve Governor Lisa Cook emphasized that the central bank is prepared to act swiftly if the unemployment rate surges, indicating a responsive approach to economic changes.

The upcoming FOMC meeting, scheduled for Jul. 31, is just six days away. According to the CME FedWatch tool, nearly 7% of traders believe the target rate probabilities will be between 5% and 5.25%.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote