China’s central bank cuts reserve requirement ratio and interest rates again in eight months

Pan Gongsheng, governor of the People’s Bank of China (PBOC), announced at a press conference on May 7 that the 7-day short-term interest rate (reverse repurchase operation rate) used to inject funds into commercial banks will be reduced from 1.5% to 1.4%, a decrease of 0.1%. The deposit reserve ratio, which shows the proportion of deposits deposited by financial institutions in the central bank, was also reduced by 0.5 percentage points.

The PBOC has positioned the 7-day short-term interest rate as the main policy rate. It is expected that the loan market benchmark rate (LPR) will also be reduced by about 0.1% through this rate cut.

The purpose is to lower the overall interest rate through rate cuts to support the economy that may slow down due to Sino-US trade frictions such as Trump’s tariffs. This is the second rate cut in 8 months since September 2024.

Due to the reduction in the deposit reserve ratio, financial institutions will be able to reduce the funds deposited in the central bank, and the ability of banks to use credit will be strengthened. Pan Gongsheng predicted that with the reduction in the deposit reserve ratio, it is expected to provide about 1 trillion yuan of long-term liquidity to the financial market.

Due to the US’s imposition of tariffs on China, China’s export industry will be greatly impacted. Weak exports will lead to a decline in domestic demand, so the press conference also stated that funds will be provided to stimulate domestic consumption. A low-interest loan quota of 500 billion yuan will be launched for service expenditures, etc.

Boosting the continuously sluggish real estate market is also given attention. Regarding the interest rate when applying for a housing loan, it is intended to lower the loan interest rate for the purchase of the first house, etc. The easing policy will be gradually strengthened to alleviate the impact of the friction related to US tariffs on the economy from the financial level.