Apr 15 2024: China’s central bank opted to keep its key policy interest rate unchanged on Monday as it rolled over maturing medium-term loans, while also withdrawing some liquidity from the banking system through bond instruments.
The decision to maintain the medium-term lending facility (MLF) rate at 2.50% underscores the central bank’s focus on currency stability amidst an uncertain economic recovery and market speculations regarding the timing of potential U.S. Federal Reserve interest rate cuts this year.
Although there’s a call for more stimulus to bolster China’s economy, cooling inflation, slowing credit expansion, and shrinking exports in March have complicated monetary policy decisions. Furthermore, challenges like a weakening yuan against the resurgent U.S. dollar and yield disparities with major economies have limited the effectiveness of monetary easing measures.
The MLF rate not only guides loan prime rates (LPRs) but also signals potential changes in lending benchmarks, making it a crucial indicator for market participants.
Here are the key details:
The People’s Bank of China (PBOC) maintained the rate on 100 billion yuan ($13.82 billion) worth of one-year MLF loans at 2.50%.
Market expectations aligned with the decision, as all 31 surveyed analysts anticipated no change in the rate.
With 170 billion yuan of MLF loans expiring this month, the operation led to a net withdrawal of 70 billion yuan from the banking system.
March saw a modest 0.1% increase in consumer prices from a year earlier, signaling a need for continued economic support.
The context surrounding China’s economic challenges includes:
Sharp declines in exports and unexpected contractions in imports in March, highlighting the delicate task of economic revival.
Moderate growth in new bank lending and record lows in broad credit expansion.
A decline of about 1.9% in the yuan’s value against the U.S. dollar in 2024, driven by relative yield differentials and foreign investment outflows.
Experts’ views on the situation:
Raymond Yeung from ANZ notes a cooling expectation for rate cuts, with the PBOC exploring other tools like reserve requirement ratios (RRRs) and relending programs.
Lynn Song from ING points out that while RRR cuts may be preferred, their impact could be limited due to weak borrowing demand amidst current economic conditions.
The upcoming release of first-quarter GDP data and key activity indicators will provide further insights into China’s economic trajectory.