China's Central Bank Holds Rates, Drains Banking System Cash

China's central bank opted to maintain its key policy interest rate unchanged on Monday, a move widely anticipated as it rolled over maturing medium-term loans. Simultaneously, it siphoned some liquidity from the banking system through bond instruments.

Why It Matters

The decision to keep the medium term lending facility (MLF) rate steady reflects the central bank's commitment to stabilising the currency amidst an uncertain economic rebound and countering market speculation about the timing of the first U.S. Federal Reserve interest rate hike this year. Despite signs of cooling inflation, slowing credit expansion and a decline in exports in March, analysts assert the necessity for further stimulus to reignite momentum in the world's second-largest economy.

However, efforts to ease monetary policy are hampered by a weakening yuan, driven by a strengthening U.S. dollar and yield disparities with other major economies. Moreover, the MLF rate acts as a reference for loan prime rates (LPRs), making it a crucial indicator for market participants anticipating changes in lending benchmarks.

By the Numbers

The People's Bank of China (PBOC) maintained the rate on 100 billion yuan (USD 13.82 billion) of one-year MLF loans at 2.50 per cent. A Reuters survey of 31 analysts unanimously predicted the bank's decision to keep the rate unchanged. With 170 billion yuan worth of MLF loans due to mature this month, the operation resulted in a net withdrawal of 70 billion yuan from the banking system.

In March, consumer prices increased by 0.1 per cent year on year, compared to 0.7 per cent in February, marking the first gain in six months. The decrease in demand for MLF loans was attributed to easing liquidity conditions, as evidenced by the decline in the interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs) below the MLF rate, reaching 2.0778 per cent.

Context

March witnessed a significant contraction in exports, coupled with an unexpected decline in imports, highlighting the challenges policymakers face in bolstering economic recovery. New bank lending in March fell short of market expectations, while overall credit growth hit a record low. The yuan depreciated by approximately 1.9% against the U.S. dollar since the beginning of the year, driven by its relatively lower yields and foreign investment outflows from a sluggish stock market.

China is set to unveil first-quarter gross domestic product data and key activity indicators, such as retail sales and industrial production, on Tuesday.