The People’s Bank of China (PBOC) kicked off a new easing cycle on Monday by lowering interest rates for the first time in four years – a move designed to safeguard against further trade-war turbulence.
For all the talk about President Trump being “easy to read,” China doesn’t seem to be fairing too well in the now multi-year trade war. But the need to lower interest rates reflects a deeper problem that extends far beyond tariffs.
PBOC Cuts Interest Rates
On Monday, the Chinese central bank announced it plans to lower the seven-day reverse repo rate to 2.5% from 2.55%. While the move is tiny relative to what other central banks are doing, it’s the first reduction since 2015.
The central bank also conducted another open market operation, injecting some 180 billion yuan ($25.7 billion) into the monetary system.
The move wasn’t entirely unexpected. Just days prior to the rate cut, PBOC disclosed that “a divergence of inflation expectations” may alter the course of monetary policy. Earlier this month, policymakers lowered interest rates on their medium-term lending facility, which is used by financial institutions for longer-dated funding needs.
PBOC Is Addressing a Wider Issue
PBOC is just the latest central bank to join the rate-cutting frenzy. Like its peers in the U.S., Europe and Oceania, PBOC is sending a strong signal that it’s worried about the economy.
The rate cut confirms that Chinese policymakers are concerned about the trade war, which has undermined business investment and contributed to the worst economic slowdown in almost 30 years. China’s weakening position is reflected almost everywhere, including industrial production, new manufacturing orders, exports, retail sales and fixed-asset investment.
Unfortunately for policymakers in Beijing, lowering interest rates won’t reverse a sharp decline in foreign and domestic demand. It certainly won’t be enough to boost manufacturing, which according to some measures has…