The People’s Bank of China (PBOC) kept its one-year policy rate unchanged, after slashing funding costs by the most on record a month ago, suggesting authorities are cautiously pacing monetary stimulus to support the economy.
China’s central bank kept the interest rate on the medium-term lending facility steady at 2 percent while draining a net 89 billion yuan (US$12.5 billion) for this month, it said in a statement yesterday.
All but one of the 15 economists polled by Bloomberg predicted the rate would remain unchanged.
Photo: Bloomberg
Beijing reduced the cost on the funding facility by an unprecedented 30 basis points late last month, although the rate is being replaced by a shorter-term one as the main lever to guide markets as part of the monetary authority’s recent overhaul of its policy tools.
Traders are zeroing in on any stimulus measures China has to offer, after PBOC Governor Pan Gongsheng (潘功勝) last month announced outsized cuts to rates and the reserve requirement ratio in a blockbuster press briefing.
Those moves can free up cash for banks to lend, helping the economy to meet its growth goal of about 5 percent this year.
“This is largely in line with market expectations, both the unchanged rate and a small net withdrawal, but it doesn’t mean that the PBOC is not supportive of liquidity,” said Zhi Xiaojia (治曉佳), chief China economist at Credit Agricole SA.
The 30-year bond yield climbed one basis point to 2.36 percent, while 30-year bond futures dropped 0.2 percent.
The central bank is likely to roll out more policy easing steps such as a reserve requirement ratio (RRR) cut in the coming month, Zhi said.
The size of the reduction could be 50 basis points again, as a total of 2.9 trillion yuan of municipal liquidity facility (MLF) funds will mature in the next two months while the government might issue more bonds, she said.
Pan last week said that the central bank might cut the RRR by 25 to 50 basis points by the end of the year depending on market liquidity conditions.
Opinions on the potential window for the next interest rate cut are more divided. Some believe that the bank might wait until early next year to cut rates again to avoid putting too much pressure on the yuan. Others have flagged the possibility of a move before the end of this year to counter headwinds such as a deterioration in market sentiment if former US president Donald Trump wins the US presidential election.
Serena Zhou, senior China economist at Mizuho Securities Asia Ltd, forecast a 20-basis-point cut to the seven-day reverse repo rate — now regarded as the main policy rate — by the year’s end, along with additional fiscal stimulus to support domestic demand.
Further rate cuts might add to Beijing’s efforts to revive growth, including measures to support the ailing housing sector.
A stimulus package announced since late last month has prompted a stock rally, although global monetary and financial officials believe more needs to be done to rebalance the economy as well as to tackle weak domestic demand and overcapacity.
China’s economy expanded at the slowest pace in six quarters in the three months ended last month, despite early signs of improved consumption during the final weeks of the period.
On Friday, the central bank added 700 billion yuan of cash with MLF as 789 billion yuan of funds came due.
The net withdrawal reflects banks’ reduced demand for cash after the previous RRR cut, as well as the fact that the MLF’s cost at 2 percent is still higher than market rates and other tools, analysts said.
The central bank has embarked on an overhaul of its policy toolkit since June with the goal of operating it similarly to global peers to influence markets more effectively.
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