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In a move to bolster China's economy, the People's Bank of China (PBOC) has unexpectedly slashed a key interest rate.

The central bank announced a reduction in the seven-day reverse repo rate from 2.0 percent to 1.9 percent, marking the first such adjustment since August of the previous year.

The seven-day reverse repo rate represents the short-term interest paid by the central bank on loans received from commercial lenders. By lowering this rate, the PBOC aims to boost the domestic money supply and stimulate spending across various sectors.

Economists had anticipated monetary easing measures in the near future, however, in the form of a reduction in the required reserve ratio rather than an interest rate cut, according to Julian Evans-Pritchard, an economist at Capital Economics.

Chinese authorities have recently reported a series of economic indicators, which show a slowdown in the nation's post-Covid recovery plan.

In May, consumer prices rose by a mere 0.2 percent year-on-year, and factory activity contracted for the second consecutive month.

While Beijing has maintained low-interest rates compared to other major economies in Europe and the US, near-zero inflation presents a significant challenge for policymakers as they strive to stimulate growth and spending.

In a bid to encourage the latter, China's six largest state-owned commercial banks also reduced interest rates for savers after being directed to do so by the central bank.

The PBOC's decision to cut the seven-day reverse repo rate on Tuesday suggests that further reductions in key interest rates, such as the one-year medium-term lending facility rate and the loan prime rate, are likely to follow later this month, according to Ting Lu, Chief China Economist at Nomura, a Japanese financial holding company.

The PBOC injected 2 billion yuan ($279.97 million) into the economy through the short-term bond instrument which reduced the reverse repo rate.