China leaves key rate steady as yuan limits manoeuvring room
CHINA refrained from cutting a key policy interest rate as its central bank sought to shield the yuan from volatility, underscoring the challenges policymakers face as they try to manage economic risks and pressures from deflation.
The People’s Bank of China (PBOC) held the interest rate on its one-year policy loans at 2.5 per cent on Sunday (Feb 18) while injecting a small amount of cash into the financial system, both moves in line with expectations among most economists surveyed by Bloomberg. The move came after the yuan slipped to a three-month low in offshore trading last week amid a resurgence in the US dollar.
Chinese authorities are in a quandary. On one hand, looser monetary policy can lead to lower funding costs and spur more economic activity. On the other, they are trying to avoid a depreciation of the yuan as policy diverges with the US, where bets on rate cuts by the Federal Reserve are being pushed back as inflation remain sticky.
“This morning’s outcome does not preclude any further easing” by the central bank, said Frances Cheung, a rates strategist at OCBC in Singapore, who added that external factors may play a role in any timing on rate cuts by the PBOC.
China’s economy is flagging under the weight of a property crisis, weak confidence and deflation pressures. The central bank’s reluctance to ease aggressively underscores the mismatch with hopes among investors for bazooka-style stimulus – a disparity that is in part fuelling a sell-off in the nation’s stock market.
While the central bank has not cut policy rates in several months, authorities have still taken a raft of other steps intended to restore confidence. Earlier this month, the PBOC pumped long-term cash into the banking system with a cut to the reserve-requirement ratio for lenders. Officials have also tightened rules on the lending of shares for short selling and boosted support for the yuan via the central bank’s daily reference rate.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The PBOC has also been pumping cash into the financial system through its key lending facility for 15 straight months.
Sunday’s net injection of one billion yuan (S$188.9 million) conducted via the MLF was the smallest infusion since August. It appeared aimed at keeping liquidity balanced after the week-long Chinese New Year holiday, said Ming Ming, chief economist at Citic Securities.
Chinese banks may still cut their lending rates in the coming week, said Ming, adding that such a move would “help lower financing costs and support stable recovery of the economy”.
“China is heading to a slightly laxer monetary policy,” said Gary Ng, senior economist at Natixis, who added that there is “still room” for a rate cut of 10 basis points next month.
OCBC’s Cheung flagged deflation as a consideration for the PBOC as it decides whether to cut policy rates.
Price pressures have worsened in recent months, with consumer costs dropping last month at the fastest pace since the global financial crisis. A separate measure of economy-wide prices marked its longest slide since 1999 in the fourth quarter of last year.
Early travel and spending data from the Chinese New Year holiday offered some signs of a pickup in consumer spending, though muted initial box office figures suggested people may be reducing their spending per trip. BLOOMBERG
Share with us your feedback on BT's products and services
