Chinese yuan can be under more pressure after the surprise rate cut

January 18, 2022: -China’s central bank unexpectedly cut loan rates on Monday, a move that will likely put more downward pressure on the Chinese yuan, one analyst said.

“What has happened this morning won’t help the case. And should contribute to more downward pressure on CNY,” Gareth Berry, Macquarie Group’s foreign exchange strategist, told CNBC on Monday, which added that it could push up the range toward 6.55 yuan per dollar.

On Monday, the Chinese yuan is currently trading at about 6.34 to the dollar.

To boost the economy, the Chinese central bank said it would cut the interest rate on 700 billion yuan worth of one-year medium-term lending facility (MLF) loans to 2.85%, ten basis points lower, according to Reuters.

This was the first time. People’s Bank of China cut the MLF rate in April 2020.

While the rate cut was in line with market expectation, it shows Chinese policymakers are concerned about economic growth, said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note.

“Economic growth is under pressure; the latest omicron outbreaks in China exacerbated the downside risk. The lower inflation opened the policy room. We think China is at the early stage of a rate cut cycle,” he said.

The central bank also cut the seven-day reverse repurchase rate, another lending measure. The PBOC also injected one more 200 billion yuan of medium-term cash into the financial system.

Zhang predicted more cuts in the reserve requirement ratio and interest rate in the first half of the year. The reserve requirement is the number of money banks must hold as reserves with the central bank.

“The omicron outbreak has become the top risk in China,” he said.

“We think the risk to Q1 GDP growth has shifted to the downside. The rate cut itself is a small step in the right direction,” he added, referring to Monday’s policy loan rate cut.” Still, the economic outlook largely depends on how effectively the outbreaks can be contained.”

On Monday, China reported that its economy grew by 8.1% year-on-year in 2021, according to official data from the National Bureau of Statistics. GDP in the fourth quarter rose 4% from a year ago, faster than analysts expected.