Daily Management Review

Key Policy Rate Kept Unchanged By China Central Bank In The Shadow Of The US Federal Reserve


Key Policy Rate Kept Unchanged By China Central Bank In The Shadow Of The US Federal Reserve
While rolling over medium-term loans that were about to mature, China's central bank kept a key policy rate steady on Sunday as was predicted. Beijing's monetary policy options are limited by the Federal Reserve's unclear future.

Beijing is maintaining economic support at a time when indications of ongoing deflationary pressure demand for additional stimulus. This requires a careful balancing act. However, any strong monetary movement carries the risk of igniting capital outflows and devaluation pressure on the Chinese yuan.

Following the most recent U.S. statistics, investors are now delaying the start of the Fed's monetary easing programme until at least the middle of the year. As a result, traders and analysts anticipate that China may delay implementing its impending stimulus.
The rate on 500 billion yuan ($69.51 billion) one-year medium-term lending facility (MLF) loans to certain financial institutions will remain at 2.50%, according to the People's Bank of China (PBOC).
The goal of the operation on Sunday was to "maintain banking system liquidity reasonably ample," according to a statement released by the central bank online.

Twenty-two, or seventy-one percent, of the thirty-one market observers surveyed by Reuters anticipated that the central bank would not alter the borrowing cost of the one-year MLF loans on February 18.

The exercise resulted in a net 1 billion yuan additional money infusion into the banking sector, with 499 billion yuan worth of MLF loans scheduled to expire this month.
The stable MLF rate, according to DBS's Chang Wei Liang, is the result of "policymakers' preference to anchor the yuan and limit negative rate differentials with the U.S. dollar."

Even so, after the central bank made a significant reduction to bank reserves earlier this month, several investors and market observers have increased their bets on additional monetary easing measures in the upcoming months to help the second-largest economy in the world.

In order to increase domestic demand while preserving price stability, the PBOC stated in its most recent monetary policy implementation report that it will maintain policy flexibility.
"We continue to expect two rounds of rate cuts in Q1 and Q2, with 15 basis points each to both the open market operations (OMO) and MLF rates," Ting Lu, chief China economist at Nomura, said in a note ahead of the loan operation.
He continued by saying that the most recent round of easing measures, which included a reserve requirement ratio (RRR) drop that came in earlier than anticipated, "failed to stabilise market sentiment".

The Financial News, which is supported by the central bank, stated on Sunday, citing market observers, that a reduction in the five-year tenor is more likely to occur when it comes to the benchmark loan prime rate (LPR) in the upcoming days.

Shortly after the MLF rate announcement, the newspaper posted on its official WeChat account, saying, "Lowering five-year LPR will help stabilise confidence, promote investment and consumption, and also help support the stable and healthy developments of the real estate market."
In China, the one-year LPR is the basis for the majority of newly issued and outstanding loans, whereas the five-year rate affects mortgage pricing. February 20 is the deadline for the LPRs' monthly fixing.