After Fed cut, moderate easing expected by China’s central bank, supporting yuan

After the US Federal Reserve delivered its first interest rate cut of the year, analysts said China’s central bank was likely to proceed with only moderate easing this year, despite more room being available after the Fed’s move.

On Thursday morning, the People’s Bank of China (PBOC) set the yuan’s midpoint rate – also known as the daily fixing rate – at 7.1085, down from 7.1013 on Wednesday.

The move followed the Fed’s announcement on Wednesday of a widely expected 25 basis point cut to its benchmark borrowing rate – to the 4-4.25 per cent range – after a two-day meeting of the Federal Open Market Committee.

Following the Fed’s announcement, the offshore yuan strengthened to as high as 7.086 per US dollar overnight, before trading at 7.107 on Thursday morning following the release of the daily fixing.

“We expect the PBOC’s rate cut pace to be smaller than the Fed’s this year, which means the interest rate gap will narrow and capital outflow pressures on the yuan will ease,” said Ding Shuang, chief Greater China economist at Standard Chartered Bank, who forecasts a 10 basis point cut by the Chinese central bank in the fourth quarter.

“From this perspective, it will lend support to the yuan.”