China’s central bank surprised markets yesterday with a small cut to one of their key lending rates, as the powerhouse economy continues to struggle. The cut comes in stark contrast of course to the central banks of the west, and saw commodities fall as a result, including oil, gold, and silver.
The People’s Bank of China cut their medium-term rate to 2.75%, a small cut of 10 basis points, but the first since January of this year. China has also announced further fiscal stimulus to help the economy, but the PBoC’s report also mentioned that more money would be needed to keep growth high.
Q2 saw China’s GDP growth almost flatline, growing by just 0.4% as shown in the chart above. Compared to the past two years, 0.4% is a worrying figure for the manufacturing giant. Monday also saw lower than expected figures for consumer and factory activity, while unemployment rose. Despite two years of high demand for China’s output, the country is now struggling with the disruption of a strict zero-covid policy, and a housing industry that is close to collapsing.
With other countries facing inflation and impending recessions however there could also be a demand slump still to come for China. The PBoC will also be acutely aware of the risk from overstimulating the economy and the potential to cause high inflation seen elsewhere.
The news from China was another blow for already gloomy markets and impacted Asian stock markets and commodities. Oil prices dropped just over 5% to their lowest level since Russia invaded Ukraine in March, on expectations that demand will fall.
Gold fell almost 1.6% on Monday in USD, with silver down 3.5% as the Dollar index rose on the risk-off mood in markets. The dip of course comes after a strong month for both metals and still leaves them up overall; 4% and 7.5% respectively.Safe haven demand is strong at the moment, but precious metals are still stuck between a mixed bag of economic factors. High interest rates and the resulting strength of the Dollar are chief in keeping metal prices down (with lower industrial demand also impacting silver), but impending recessions and soaring inflation are helping to keep prices up. China’s economy is by no means the only one struggling, and if the US, UK, EU and more all see slowing economies across the next 12 months and beyond then safe haven demand is likely to keep rising.