China’s central bank, the People’s Bank of China (PBOC), decided to leave the key policy rate unchanged as expected on Sunday. This decision came as the central bank rolled over maturing medium-term loans, with uncertainties surrounding the timing of potential easing by the Federal Reserve limiting Beijing’s options in terms of monetary policy adjustments.
The Chinese economy is facing persistent deflationary pressures, which have raised the need for additional stimulus measures. However, the delicate balancing act that Beijing must perform includes supporting the economy while also avoiding any aggressive monetary moves that could lead to depreciation pressure on the Chinese currency and capital outflows.
Investors and analysts had initially anticipated the possibility of imminent stimulus measures by China. Still, with the delay in the Fed’s anticipated easing following the latest U.S. data, the expectations for China to roll out immediate stimulus measures have been dampened. The recent decision by the PBOC to maintain the rate on one-year medium-term lending facility (MLF) loans at 2.50% was in line with market predictions.
The decision to keep the borrowing cost of MLF loans unchanged resulted in a net 1 billion yuan fresh fund injection into the banking system. This move was aimed at maintaining banking system liquidity at reasonably ample levels. However, amidst calls for more monetary easing measures to support the economy, some investors and market watchers have increased their bets on further policy adjustments in the coming months.
Despite the recent deep cut in bank reserves by the central bank, there are speculations about additional rate cuts in the future. Market analysts anticipate two rounds of rate cuts in the first and second quarters of the year, with a potential decrease of 15 basis points each in both open market operations (OMO) and MLF rates. The goal is to boost domestic demand while ensuring price stability.
Following the decision to maintain the MLF rate, there are suggestions that the benchmark loan prime rate (LPR) could fall in the coming days, particularly the five-year tenor. Lowering the five-year LPR is seen as a strategy to stabilize confidence, promote investment and consumption, and support the real estate market’s stable development. The LPRs are set to be fixed monthly, with the next adjustment scheduled for February 20th.
The decision by China’s central bank to maintain its policy rate amidst prevailing economic uncertainties reflects a cautious approach to monetary policy adjustments. While the need for stimulus measures remains high, the central bank is treading carefully to avoid potential risks to the currency and capital markets. As the global economic landscape evolves, China’s monetary policy decisions will continue to be influenced by external factors and domestic economic conditions.
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