Unpredictably, the 7-day reverse repo rate, which is the main rate of the People’s Bank of China, was reduced by 10 basis points to 1.7% last night. Folkmar Baur, the currency strategist of Commerzbank, states that this is the first rate cut since August last year.
Positive market response anticipated
Due to China’s capital controls and the unique characteristics of its economy, the impact of credit and monetary policy on the currency is less significant compared to other currencies. Nevertheless, 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 primarily focuses on long-term events and reforms. Although the initial communique was somewhat underwhelming, the more detailed documents released over the weekend provide a more optimistic outlook for constructive reforms, particularly in fiscal policy.
Given the weak growth indicators in the second quarter, the signal of support from the People’s Bank of China holds great importance in the near future. The upcoming official meeting of the Politburo further raises expectations regarding additional support measures. It is anticipated that the market will consider more negative scenarios of a significant growth slowdown, ultimately lending support to the yuan.