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The Chinese language yuan may come below extra strain after the shock price lower

Renminbi banknotes arranged to be photographed in Hong Kong on July 3, 2018.

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China's central bank unexpectedly cut lending rates on Monday – a move likely to put more downward pressure on the Chinese currency, an analyst said.

“What happened this morning will not help the fall (of the Chinese yuan). And should contribute to further downward pressure on the CNY," Gareth Berry, Macquarie Group's foreign exchange strategist, told CNBC on Monday, adding that it could widen the range towards 6.55 yuan-per-dollar.

The Chinese yuan is currently trading at around 6.34 to the dollar on Monday.

In a bid to boost the economy, China's central bank said it would cut the interest rate on its 700 billion yuan ($110 billion) one-year medium-term lending facility (MLF) to 2.85% — 10 basis points lower. according to Reuters.

This was the first time since April 2020 that the People's Bank of China cut the MLF rate.

While the rate cut was in line with market expectations, it shows Chinese policymakers are concerned about economic growth, Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in a statement.

“Economic growth is clearly under pressure, the recent Omicron outbreaks in China have exacerbated the downside risk. Lower inflation has opened up policy space. We believe China is in the early stages of a rate-cutting cycle," he said.

The central bank also lowered the seven-day reverse repurchase rate, another lending move. The PBOC also injected another 200 billion yuan in medium-term cash into the financial system.

Zhang predicted that there would be further cuts in the reserve requirement ratio and interest rate in the first half of the year. The reserve requirement is the amount of money that banks are required to hold as reserves with the central bank.

"The Omicron outbreak has become the biggest risk in China," he said.

“We believe the risk to GDP growth has shifted to the downside in the first quarter. The rate cut itself is a small step in the right direction,” he added, referring to Monday's key rate cut — "but the economic outlook depends largely on how effectively the outbreaks can be contained."

On Monday, China reported that its economy grew 8.1% year on year in 2021, according to official data from the National Bureau of Statistics. GDP grew 4% year over year in the fourth quarter, faster than analysts had expected.

… policymakers are much more concerned about growth now and we should see concerted action going forward.

Johanna Chua

Citi Global Markets Asia

China's zero-Covid policy aimed at limiting the virus outbreak, led to renewed travel restrictions within the country, including the lockdown of the city of Xi'an in late December.

The higher-than-expected 10 basis point MLF rate cut rate seems to indicate China is concerned about its economic slowdown, Johanna Chua, head of Asia economics and strategy at Citi Global Markets Asia, told CNBC's Street Signs Asia on Monday.

"Which I think really suggests that policymakers are much more concerned about growth now and we should see concerted action going forward."

She said the country is unlikely to abandon its zero-Covid policy anytime soon.

— CNBC's Evelyn Cheng contributed to the story

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