(Bloomberg) — China’s central bank left a key interest rate steady for the tenth straight month, displaying caution on monetary easing given abundant liquidity and pressure to prevent the yuan from weakening further.
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The People’s Bank of China kept the rate on one-year policy loans, the so-called medium-term lending facility, steady at 2.5% on Monday, in line with the forecast in a Bloomberg survey. It withdrew a net 55 billion yuan ($7.6 billion) from the banking system to avoid excessive liquidity.
The decision reflects financial authorities’ preference for currency stability over lower borrowing costs, despite a fragile recovery in the world’s second-largest economy. Beijing’s restraint may pare market bets for monetary easing that have kept local bond yields near a two-decade low.
“A rate cut would be beneficial to support the economy at this juncture” given weak credit data released last Friday, said Lynn Song, greater China chief economist at ING Bank. “It is likely that the PBOC has held off from rate cuts to date in consideration of the top level policy priority to maintain currency stability at a reasonable and balanced level.”
Authorities have refrained from outright rate cuts, with an eye toward keeping the yuan a “powerful currency,” even as voices calling for a cut grow louder. Last week, the onshore yuan slipped to the weakest level since November, weighed down by a wide US-China rate gap.
Sufficient market liquidity also keeps authorities on the sidelines, reflected in cheaper borrowing costs of a popular debt instrument. The rate on one-year AAA-rated negotiable certificates of deposits dropped to around 2%, compared with the MLF’s 2.5%. The inflows from savings to wealth management products and other higher-yielding assets pumped in cash into the financial system.
The liquidity drainage also underscores the lack of demand from market participants for the more expensive MLF loans, according to Becky Liu, head of China macro strategy at Standard Chartered Bank. “The MLF withdrawal without a rate cut is expected, given much lower funding costs in the market compared with borrowing from PBOC via MLF.”
China’s economy has undergone a patchy recovery. Exports climbed more than expected in May while inflation rose less than expected. But factory activity surprisingly contracted last month, according to an official survey. Despite accelerated government bond sales to boost infrastructure spending, the years-long property slump continues unabated.
Economists forecast 4.9% growth for this year, according to the latest result from a survey by Bloomberg. That would be roughly in line with the nation’s target of around 5%, a goal that China watchers say would require more stimulus.
–With assistance from Qizi Sun and Yujing Liu.
(Updates with analysts’ comments in fourth, seventh paragraphs.)
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