Amid the China-US trade war, China's central bank announced this week that it had decided to lower interest rates for the first time in three years. The announcement indicated that this would aid the country in protecting its declining economy and prevent further damage to Asian markets.
According to a report by CNN, investors have started regaining their confidence in Asian markets after China's central bank announced their reduction of interest rates in the market last Tuesday.
The People's Bank of China has decided to cut its medium-term lending facility to banks from 3.30 percent down to 3.25 percent. Senior China economist at Capital Economics Julian Evans-Pritchard noted that the reduction manifested China's intent of limiting their borrowing costs. He also said that the Chinese central bank may impose more cuts in the future which would benefit the Asian markets.
In a research note, Evans-Pritchard said, "The cut could well precede reductions to the rates on the rest of the PBOC's lending facilities." He also suggested that policy adjustments may also likely follow the reduction of interest rates in the country and allow entities who engage in the Asian markets to have more access to financial aid.
Evans-Pritchard also shared that the interest cut would also result in lower Loan Prime Rates (LPR). China recently utilized the tool as a replacement for the fixed benchmark lending rate. Thus, he said that the move made it easier for companies to loan money from the country's bank. The announcement was perceived as the new benchmark for banks to price loans. He also believed that it would significantly affect market rates other than the interest rates.
New economic data also revealed that China is currently experiencing slower economic growth but its economic slowdown is improving. A private survey data released last Tuesday also claimed that China's service sector has started to grow upward, a first in the last eight months.
Market analyst of research firm Oanda Jeffrey Halley claimed that reduced interest rates should only apply to investors. He revealed that the move would shift the focus of the markets to industrial PMI data and may push for interim trade deals with other nations soon.
According to the Financial Times, the reduction in China's interest rate may ease up tensions in the China-US trade war talks. The Trump administration was also reported to have made a similar move and manifested its willingness to reduce tariff rates on Chinese goods. The US has also shared its intent on ending the trade war with Beijing by the end of the month.
