THE central bank unexpectedly trimmed a closely watched lending rate yesterday, the first such cut in more than four years and a signal to markets that policymakers are ready to act to prop up slowing growth.

The People’s Bank of China (PBOC) said on its website that it was lowering the seven-day reverse repurchase rate to 2.50 percent from 2.55 percent.

The move cheered China’s bond market and came just two weeks after the PBOC cut the borrowing cost on its medium-term lending facility (MLF), used by banks for longer-dated funding needs, by the same margin.

Both cuts raise the likelihood that the PBOC will trim its new benchmark loan prime rate (LPR), off of which many lenders base their mortgage rates, this week in a bid to free up funds to credit-starved parts of the economy.

Analysts say the unexpected cut yesterday also shows the central bank is keen to ease investor worries that higher retail inflation would prevent it from delivering fresh stimulus.

Zhou Hao, economist at Commerzbank in Singapore, said the reverse repo rate cut indicates a policy change in coming months, including “some fine-tuning to prioritize the pro-growth policy for the time being.”

Driven by soaring pork prices due to the spread of African swine fever, China’s consumer inflation rose past the government’s target of around 3 percent in October to its fastest pace in almost eight years.

That had raised some concerns the PBOC may be constrained in its efforts to ease policy. In a report released Saturday, the PBOC said it would maintain prudent monetary policy to prevent inflation from spreading.

However, market participants believe the two recent market rate cuts suggest a similar adjustment in the LPR this week.

Yan Se, chief economist at Founder Securities in Beijing, said the reverse repo rate cut showed authorities were open to using open market operations, typically used to meet the financial system’s daily funding needs, to stimulate longer term growth in the real economy.

“Commercial banks comprehensively evaluate financing costs to decide the LPR, so lowering reverse repo rates could maintain monetary policy stability,” Yan said.

“Against the backdrop of such a situation, a five-basis-point reduction in LPR is a high probability event.” A cut to banks’ reserve requirement ratio (RRR) is also possible, he added.(SD-Agencies)