(ATF) After cutting the medium-term loan facility (MLF), it’s major policy tool, already twice this year, the People’s Bank of China (PBOC) cut the interest rate on its targeted medium-term lending facility (TMLF) Friday, following similar reductions on other liquidity tools in the past few weeks to support the economy.
The one-year interest rate on the TMLF was lowered by 20 basis points to 2.95% from 3.15% in the previous operation.
This latest move is likely to be a prelude to a further cut in the benchmark Loan Prime Rate (LPR). As I noted Thursday, after reluctance until a few weeks ago, aggressive monetary easing is now on the PBOC agenda as fears of inflation recede and PPI deflation makes a worrying comeback with lower oil and overall output.
Downward pressure on the Chinese currency should be expected as a result.
But as of Friday, there was no visible impact. The PBOC set parity at 7.0803 Friday morning, marginally stronger than the day before; CNY traded 7.0786 at 7pm HK time.
This reflected the near inactivity in most US dollar crosses, with the DXY at 100.4220 at 7pm, unchanged from the Asia opening.
But don’t count on such calm to prevail. Most traders are of the view that more aggressive PBOC easing must lead to a lower yuan and that hedging against that is clearly advisable.
And speaking of aggressive easing, it is all but certain that the Bank of Japan will announce unlimited bond buying at its Monday meeting. But note, too: that’s hardly new for Japan and will not put much downward pressure on the yen.
Japan invented quantitative easing – and no, not in 2002 or thereabouts, but in 1929-30. While finance minister at the time, Viscount Takahashi Korekiyo, abolished the gold standard and bought all the government debt issued. He saved Japan from the Great Depression that devastated the rest of the world.
Unhappily, when inflation ensued and the Viscount tried to control it by curtailing military spending, the military assassinated him in 1936.
Let’s hope that the Jietai are kinder to current Governor Kuroda.