China holds rates: China's central bank decided to maintain its key policy interest rate unchanged on Monday as expected, while also withdrawing some funds from the banking system through bond instruments.

Why it matters

By keeping the medium-term lending facility (MLF) rate steady, the central bank is signalling its focus on stabilising the currency amidst an uncertain economic recovery and pushing back against market expectations of a potential US Federal Reserve interest rate cut this year.

Despite signs of cooling inflation, slowing credit expansion, and decreased exports in March, analysts suggest that more stimulus might be necessary to reignite growth in the world's second-largest economy.

However, efforts to ease monetary policy are constrained by a weakening yuan against the strengthening US dollar and yield differentials with other major economies.

The MLF rate also influences loan prime rates (LPRs), with markets typically viewing changes in the MLF rate as a precursor to adjustments in lending benchmarks.

By the numbers

The People's Bank of China (PBOC) maintained the rate on 100 billion yuan ($13.82 billion) of one-year MLF loans to financial institutions at 2.50 per cent.

In a Reuters poll, all 31 market watchers expected the bank to keep the rate unchanged.

With 170 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net withdrawal of 70 billion yuan from the banking system.

Consumer prices rose 0.1 per cent year-on-year in March, compared to 0.7 per cent in February and below a Reuters poll forecast of 0.4 per cent.

Market context

March saw a sharp contraction in exports and unexpected shrinkage in imports, undershooting forecasts and highlighting the challenges facing policymakers in stimulating economic recovery.

New bank lending in March was lower than market expectations, while broad credit growth hit a record low.

The yuan has depreciated by approximately 1.9 per cent against the US dollar so far this year, influenced by its relatively low yields compared to other currencies and foreign investment outflows from a sluggish stock market.

Raymond Yeung, Chief Economist for Greater China at ANZ in Hong Kong, stated, "The rate cut expectation is cooling now, as the PBOC has picked other tools such as reserve requirement ratio (RRR) and new relenting programs from the toolbox recently."

Lynn Song, Chief Economist for Greater China at ING in Hong Kong, mentioned, "The PBOC has previously hinted that RRR cuts might be preferred over rate cuts, though as lending data has illustrated, the impact of RRR cuts may be less effective than in the past given amid weak borrowing demand."

(With Reuters Inputs)