China’s central bank holds key rate steady in policy surprise
CHINA’S central bank held a key interest rate steady on Monday (Jan 15) while still pumping more cash into the financial system, bucking expectations that it would cut borrowing costs to support the economy.
The People’s Bank of China (PBOC) maintained the rate on its one-year policy loans – called the medium-term lending facility (MLF) – at 2.5 per cent, contrary to widespread expectations among economists that it would make its first trim to the rate since August.
It also offered 995 billion yuan (S$189.6 billion) through the MLF, resulting in a 216 billion yuan net injection that will boost liquidity and help meet funding demand.
Markets have been expecting policymakers to act in response to recent data pointing to faltering growth momentum in the world’s second-largest economy.
Data released on Friday added to the concerns, with the country having marked its longest deflationary streak since 2009 in December. Exports fell annually last year for the first time since 2016 due to weak global demand. Financing and loan growth last month missed expectations. Weak domestic demand, a prolonged property crisis and the sluggish job market remain major overhangs this year.
The central bank took several fairly aggressive steps in December to support the economy, short of a rate cut. It rolled out a record 800 billion yuan via the MLF to lenders and injected more cash into the banking system. The PBOC also provided nearly 350 billion yuan worth of low-cost funds into policy-oriented banks in the month to finance housing and infrastructure projects.
More will likely be needed. Expectations are growing among investors and economists for the PBOC to cut the reserve requirement ratio (RRR), or the amount of cash banks must hold in reserve – especially after a senior central bank official mentioned that ratio in an interview with state media last week.
Cutting the RRR would unleash even more money into the financial system, thereby helping banks buy government bonds that would be issued to finance infrastructure spending.
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