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Surprise: China cuts interest rates

China makes a sudden interest rate cut to boost bank liquidity and stimulate the economy

China’s central bank has abruptly cut the amount of money banks must hold in reserve in an effort to keep money flowing through the financial system and support the economy.

The People’s Bank of China (PBOC) said it will lower the minimum reserve ratio for nearly all banks by 0.25 percentage point, starting March 27. “[Devemos] Make a good combination of macroeconomic policies, better serve the real economy, and maintain reasonable and sufficient liquidity in the banking system,” the People’s Bank of China said in a statement.

Friday afternoon’s move came as a surprise and came after a week of turmoil in global financial markets, sparked by the failure of some regional US banks.

Also on Wednesday, analysts at Goldman Sachs said they expect the People’s Bank of China (PBOC) to keep interest rates and the legal reserve ratio “unchanged” through the end of the first half of 2023.

Analysts explained that the central bank has already pumped hundreds of trillions of yuan into the banking system since January, mainly by facilitating medium-term lending.

The rapid collapse of the two US banks and problems at Credit Suisse raised concerns about the health of the world’s banking sector.

Regulators on both sides of the Atlantic have taken emergency measures since Sunday to provide liquidity support to distressed creditors and boost confidence in the banking system. On Thursday, a group of some of the largest US banks stepped in to bail out First Republic with a $30 billion bailout.

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Earlier this month, Yi Gang, governor of the People’s Bank of China, hinted at a press conference that monetary policy this year will be broadly stable. “The current level of real interest rates is relatively appropriate,” he said. But he also acknowledged that lowering the required reserve ratio “remains an effective monetary policy tool” to provide long-term liquidity and support the economy.