unexpected drop in a rate to revive the economy

China’s central bank surprised analysts on Tuesday to cut its key short-term interest rate, a move to support activity in the world’s second-largest economy amid faltering post-Covid recovery.

The main rate at which the central bank provides short-term liquidity to commercial banks (the seven-day repo rate) has been lowered from 2% to 1.9%, according to a statement from the issuing institute.

The measure is effective immediately, is it precise.

The last drop in this rate dates back to August 2022.

The move reflects growing concern among policymakers about the health of China’s recovery, said analyst Julian Evans-Pritchard of Capital Economics.

The post-Covid recovery hoped for after the lifting of health restrictions at the end of 2022 has tended to run out of steam in recent weeks, and is barely materializing in certain sectors.

A sign of this slowdown, the amount of loans granted in China fell to 1.360 billion yuan (176 billion euros) in May, according to figures published on Tuesday by the central bank.

This is less than the expectations of analysts polled by Bloomberg (1.600 billion yuan).

These figures add to a series of disappointing economic indicators for China last month.

Inflation in the country was notably close to zero, while ex-factory prices experienced their sharpest decline since 2016, signs of sluggish demand and a complicated environment for businesses.

Asian glove exports, historically a growth driver for the country, for their part contracted last month by 7.5% over one year. And manufacturing activity fell for the second consecutive month.

To stimulate activity by discouraging savings, China’s major state-owned banks already cut rates on a range of deposit products last week.

In this context, some analysts are expecting a drop on Thursday in the rate for one-year loans from the central bank to financial institutions (MLF), closely followed by the markets.

It remains to be seen whether the increase in the supply of credit will be enough to stimulate lending, warns Mr. Evans-Pritchard, not very optimistic.

In his view, without a solid stimulus plan, monetary easing will translate into modest support […] economic activity.

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