China central bank keeps policy rate unchanged, drains cash from banking system

CHINA’S central bank on Monday (Apr 15) left a key policy interest rate unchanged as widely expected when rolling over maturing medium-term loans, and drained some cash from the banking system through the bond instrument.

Why it’s important

Keeping the medium-term lending facility (MLF) rate steady underscores the central bank’s intention to maintain currency stability amid a shaky economic recovery and push back on market expectations around the timing of a first US Federal Reserve interest rate cut this year.

Cooling inflation, slowing credit expansion and shrinking exports in March all pointed to the need for more stimulus to revive momentum in the world’s second-largest economy, analysts said.

But a weakening yuan on the back of a resurgent US dollar and yield differentials with other major economies constrained authorities’ monetary-easing efforts.

In addition, the MLF rate serves as a guide to loan prime rates (LPRs) and markets mostly use the MLF rate as a precursor to change in lending benchmarks.

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By the numbers

The People’s Bank of China (PBOC) said it was leaving the rate on 100 billion yuan (S$19.2 billion) worth of one-year MLF loans to some financial institutions at 2.50 per cent.

In a Reuters poll of 31 market watchers, all respondents expected the bank to leave the rate unchanged.

With 170 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 70 billion yuan of fund withdrawal from the banking system.

Consumer prices rose 0.1 per cent in March from the same month a year earlier, versus 0.7 per cent in February - the first gain in six months - and 0.4 per cent in a Reuters poll.

Signs of loosening in cash conditions reduced demand for MLF loans as the interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, has fallen below the MLF rate. It last traded at 2.0778 per cent.

China is due to release first-quarter gross domestic product data and activity indicators, including retail sales and industrial production, on Tuesday.

Exports contracted sharply in March whereas imports unexpectedly shrank, undershooting forecasts by large margins, highlighting the task facing policymakers as they try to bolster economic recovery.

New bank lending rose less than markets expected in March from the previous month, while broad credit growth hit a record low.

The yuan has lost about 1.9 per cent in value against the US dollar so far this year, pressured by its relative low yields versus other currencies and outflows of foreign investment from an anaemic stock market. REUTERS