China's Central Bank Maintains Medium-term Rate Amidst Economic Uncertainty
China's central bank has chosen to keep the medium-term policy rate unchanged, contrary to market expectations. This decision signals constraints on monetary easing as China faces challenges such as a softer currency and an uneven economic recovery.
Despite a boost in December exports, China's economic indicators present a mixed picture. Weak credit growth and persistent deflationary pressures suggest a need for additional stimulus measures. The People's Bank of China (PBOC) decided to maintain the rate on one-year medium-term lending facility (MLF) loans at 2.50 per cent, totaling 995 billion yuan (USD 138.84 billion), in an effort to sustain reasonably ample liquidity within the banking system.
Market watchers had expected a rate cut to support the struggling economy, especially as several major Chinese banks had lowered deposit rates late last year. Disappointing economic data further fueled expectations for additional stimulus measures.
Barclays economists highlighted the urgency for the PBOC to implement monetary easing, citing an entrenched debt-deflation spiral and widespread pessimism among economic agents in China. However, challenges emerged due to a narrowing interest rate margin at commercial banks and a 1 per cent decline in the Chinese yuan against the dollar, limiting the central bank's room for maneuver.
Despite expectations for a reduction in banks' reserve requirement ratio (RRR), the PBOC's decision to hold the rate steady suggests a cautious approach. The recent weakening of the yuan to a more than one-month low against the dollar, coupled with uncertainties surrounding the timing of US Federal Reserve interest rate cuts, played a role in deterring rate adjustments.
To address the 779 billion yuan worth of MLF loans set to expire this month, the central bank injected a net 216 billion yuan into the banking system through the MLF operation. Additionally, the PBOC injected 89 billion yuan through seven-day reverse repos while maintaining borrowing costs at 1.80 per cent.
As investors await crucial economic data this week, including December industrial output, investment, and retail sales, along with fourth-quarter gross domestic product, uncertainties persist about the need for further economic support in China.
