Market expects more Chinese rate cuts

Three is obviously not a charm. Even after the People’s Bank of China cut interest rates for the third time in six months, the market doesn’t believe the process is over.

China’s one-year interest-rate swaps declined on Tuesday to their lowest level in more than four years on speculation the central bank will soon cut rates again, reported Bloomberg.

Of course, lower interest rates means more liquidity and stimulus pouring into the system, which is done with the expectation of foistering more economic growth.

On Sunday, the monetary authority lowered its one-year lending rate by 0.25 percentage point to 5.1% and the one-year savings rate by the same amount to 2.25%. This led the central bank Tuesday to halt open-market operations and not sell any repurchase or reverse-repurchase agreements for a seventh session.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, fell as much as 11 basis points to 2.32%, the lowest level since October 2010. By the end of the Shanghai trading day, it had bounced back to 2.35%, according to Bloomberg.

The overnight repo rate fell for the 17th consecutive day, by four basis points to 1.25%, according to a weighted average from the National Interbank Funding Center. This is the longest decline for the overnight repo rate, which measures funding availability in the banking system, since 2010.

China is scheduled to release economic data for April this week, including on industrial output and credit growth.

“The market is building up expectations for some downside surprises from the data, which in turn translates into expectations for more easing from the PBOC,” Frances Cheung, Societe General’s Hong Kong-based head of rates strategy, told Bloomberg in an interview.



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