The Central Bank of China said that in order to stimulate the world's second largest economy, it decided to reduce a key short-term policy rate and its benchmark lending rates.
The Chinese economy is on the verge of deflation, facing a protracted real estate crisis, rising debt and weak consumer and business sentiment. In addition, trade tensions are escalating as world leaders increasingly fear China's dominant position in exports.
The People's Bank of China (PBoC) cut the interest rate on seven-day reverse repos to 1.7% from 1.8%. The action was aimed to strengthen counter-cyclical adjustments to better support the real economy, the central bank said. The PBoC also lowered the one-year loan prime rate to 3.35% from 3.45%. Similarly, the five-year LPR, the benchmark for mortgage rates, was trimmed to 3.85% from 3.95%.
After the announcement of rate cuts, China's 10-year government bond yield slipped 3+basis points to 2.23%, while the USD/CNY rose 0.05% to 7.2731.
Economists said the Central Bank's latest decisions were made after official data showed that GDP growth slowed to 4.7% in the second quarter on weaker consumption and property market downturn.
"The fact that the Central Bank of China did not wait for the Fed's decision to cut the rate indicates that the government is aware of the downward pressure on the Chinese economy. Further interest rate cuts in China are possible after the Fed begins its monetary policy easing cycle," Pinpoint Asset Management economists said.