People’s Bank of China maintains medium-term policy rate

People’s Bank of China did not bring changes to a key policy rate as expected while rolling over maturing medium-term loans on Sunday.

The development comes amid rising inflation in the country. Even as more action was expected for the economy as consumer prices plummeted, the inaction is to prevent volatility in the yuan.

The currency is facing pressure due to a sluggish Chinese economy and diverging monetary policy from the US.

The Chinese Central Bank said it was maintaining the rate on 500 billion yuan ($69.51 billion) worth of one-year medium-term lending facility (MLF) loans to select financial institutions, at 2.50 per cent compared to the previous operation.

PBOC also injected 105 billion yuan through seven-day reverse repos, as the borrowing cost remained unchanged at 1.80 per cent, as per an online statement.

A market watchers poll conducted by Reuters reflected that out of 31 market watchers, 71 per cent of them expected the central bank to maintain the borrowing cost of the one-year MLF loans on February 18.

The operation resulted in a net 1 billion yuan fresh fund injection into the banking system, with 499 billion yuan worth of MLF loans set to expire in February.

The South China Morning Post a day ago had predicted the policy rate to remain unchanged, on the back of policymakers focus on the currency weakening. 

Last month, investors expecting the first cut in medium term loans were left disappointed but then policymakers announced a bigger-than-expected reduction in the reserve requirement ratio (RRR) for banks, seen as one of the several measures for elevating sentiment.

Becky Liu, head of China macro strategy at Standard Chartered told the South China Morning Post that the slashing of medium term loans right two weeks after the RRR cut seemed “too rushed.”

 The “concern” is measures taken by China to support the economy may not be “aggressive enough to imminently turn around the market sentiment,” as per other experts.

(With Reuters inputs)