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China’s central bank keeps main policy rate unchanged amid influence from Federal Reserve

China’s Central Bank Leaves Key Policy Rate Unchanged

Policy Rate Unchanged to Rollover Maturing Medium-Term Loans

China’s central bank chose to keep a key policy rate unchanged as expected on Sunday when rolling over maturing medium-term loans. This decision was made amidst uncertainties around the timing of an easing by the Federal Reserve, limiting Beijing’s room to manoeuvre on monetary policy.

Delicate Balancing Act to Support the Economy

Beijing is facing a delicate balancing act to support the economy in the face of persistent deflationary pressure, which calls for more stimulus measures. However, any aggressive monetary movement risks reviving depreciation pressure on the Chinese currency and capital outflows.

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Expectations Amidst Market Uncertainty

With investors pushing back the start of the Fed monetary easing, traders and analysts expect China could hold back rolling out imminent stimulus, especially after the latest U.S. data.

People’s Bank of China’s Announcement

The People’s Bank of China (PBOC) announced that it was keeping the rate on 500 billion yuan worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.

Maintaining Banking System Liquidity

Sunday’s operation was aimed at “maintaining banking system liquidity reasonably ample,” according to the central bank’s online statement.

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Market Expectations and Fund Injection

Market watchers expected the central bank to keep the borrowing cost of the one-year MLF loans unchanged. The operation resulted in a net 1 billion yuan fresh fund injection into the banking system as 499 billion yuan worth of MLF loans are set to expire this month.

Analyst’s Perspective

Chang Wei Liang, FX & credit strategist at DBS, highlighted the steady MLF rate as “policymakers’ preference to anchor the yuan and limit negative rate differentials with the U.S. dollar.”

Anticipated Monetary Easing Measures

Some investors and market watchers have ramped up their bets of more monetary easing measures in coming months to support the world’s second-largest economy after the central bank delivered a deep cut to bank reserves earlier this month.

Future Rate Cuts and Impact on Market Sentiment

Analysts anticipate two rounds of rate cuts in Q1 and Q2, with 15 basis points each to both the open market operations (OMO) and MLF rates. However, the latest round of easing measures failed to stabilize market sentiment, according to a note from Ting Lu, chief China economist at Nomura.

Prospects of Benchmark Loan Prime Rate Reduction

The central bank-backed Financial News reported that the benchmark loan prime rate (LPR) could fall in the coming days, with the five-year tenor more likely to be reduced. Lowering the five-year LPR is expected to stabilize confidence, promote investment and consumption, and support the stable and healthy developments of the real estate market.

Impact of LPR on Loans and Mortgages

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. The monthly fixing of the LPRs is due on Feb. 20.

China’s central bank is navigating monetary policy amidst uncertainties, aiming to support the economy while maintaining stability in the financial markets. With investors and analysts closely monitoring policy decisions, the future trajectory of China’s monetary policy remains a focal point in the global economic landscape.

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