(Yicai) Sept. 25 -- The People’s Bank of China trimmed the interest rate on its medium-term loans to banks, a day after the central bank announced its biggest economic stimulus package since the pandemic.

The PBOC cut the rate on CNY300 billion (USD42.7 billion) of one-year medium-term lending facility loans to 2 percent from 2.3 percent, it said today, bringing the total MLF loan balance to CNY6.88 trillion (USD980.3 billion).

The reduced rate and the stimulus measures set out yesterday, including cuts to the benchmark loan prime rate, are intended to help the world’s second-largest economy hit its annual growth target of around 5 percent after key economic data weekend further last month.

The MLF rate cut will help lower banks’ funding costs, an expert told Yicai. The LPR and deposit rates are also expected to fall accordingly, further boosting market confidence and supporting stable economic growth, the person noted.

In line with a PBOC pledge to increase the transparency of monetary policy, it also disclosed the bid rates on MLF loans for the first time today. They ranged from 1.9 percent to 2.3 percent. The bank announced in July that MLF operations would adopt a fixed-amount rate bidding method.

In the past, the results of MLF operations were announced together with those of reverse repurchase operations, the expert noted. But this time, MLF operations were announced in advance, highlighting the different policy roles played by the MLF rate and that on seven-day reverse repos.

The move supports the positioning of the MLF as a tool to provide mid-to-long-term liquidity, he added.

This month's MLF operations were CNY291 billion short of the amount expiring, according to data from Wind Information. This is because there is no need to release further liquidity into the market after yesterday's reserve requirement ratio cut, the expert explained.  

The PBOC cut the RRR by 50 basis points to free up about CNY1 trillion of long-term liquidity. It also trimmed the seven-day reverse repo rate by 20 bps to 1.5 percent, with the LPR and deposit rates pared by the same amount to keep the net interest rate spread stable at commercial banks.

Editor: Futura Costaglione