(March 25): The Chinese central bank’s new way to price its one-year policy loans may lead to a stealth reduction in funding costs for lenders, easing their pressure from elevated market borrowing rates in recent months as liquidity tightened.

The People’s Bank of China will allow qualified banks to pay different interest rates for the loans, known as the medium-term lending facility (MLF), starting Tuesday, it said in a statement Monday. Lenders previously paid the same rate for the tool.

The change will allow banks to borrow from the PBOC at rates closer to those prevailing in the market, which have largely been lower than the MLF rate in recent years, according to analysts and a report by PBOC-backed outlet Financial News. The rate on one-year AAA-rated negotiable certificates of deposits, a measure of short-term borrowing costs between banks, stands at 1.9%, below the equivalent MLF rate of 2%.

While implicit, the PBOC’s move to allow banks’ funding costs to decline signals a greater willingness to ease monetary policy. That contrasts with the central bank’s action in the last few months, when it prioritised defending the yuan and let market liquidity tighten, which sent borrowing costs climbing.

“We see the potential minor rate cut as a signal of monetary stance turning from a hawkish bias year to date to accommodative as China’s policymakers brace for external volatilities,” Citigroup Inc economists including Yu Xiangrong wrote in a note Tuesday. They pointed to more US tariffs as a key risk for growth.

The yield on China’s benchmark 10-year government bonds hovered near the lowest level in two weeks. In the futures market, the 30-year contracts surged as much as 0.9% before trimming gains.

The PBOC has yet to announce the latest rates for the MLF as of Tuesday at 11.20am (same time as Malaysia).

China’s top leaders in December endorsed a “moderately loose” monetary policy for the first time since 2010 but the PBOC has yet to make broad easing moves. The Chinese central bank so far skipped a highly anticipated cut to the reserve requirement ratio which determines the amount of cash banks must keep in reserves.

It has hinted at external constraints on loosening policy, as the dollar’s strength only moderated recently and the Federal Reserve’s rate cut path remains uncertain. Domestically, banks’ narrowing net interest margins also limit the space for further rate reduction.

Along with the change in the pricing method, the PBOC also announced a net injection of RMB63 billion (RM38.52 billion) via the MLF tool in March, the first net addition since July.

“The change in the MLF bidding method and a resumption of net injection unleashed an easing signal,” Citic Securities analysts including Ming Ming wrote in a report Tuesday.

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