China central bank keeps policy rate unchanged, drains cash from banking system

File photo: Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang/File photo

SHANGHAI/SINGAPORE (Reuters) -China’s central bank on Monday left a key policy interest rate unchanged as widely expected when rolling over maturing medium-term loans, and drained some cash from the banking system through the bond instrument.

WHY IT’S IMPORTANT

Keeping the medium-term lending facility (MLF) rate steady underscores the central bank’s intention to maintain currency stability amid a shaky economic recovery and push back on market expectations around the timing of a first U.S. Federal Reserve interest rate cut this year.

Cooling inflation, slowing credit expansion and shrinking exports in March all pointed to the need for more stimulus to revive momentum in the world’s second-largest economy, analysts said.

But a weakening yuan on the back of a resurgent U.S. dollar and yield differentials with other major economies constrained authorities’ monetary-easing efforts.

In addition, the MLF rate serves as a guide to loan prime rates (LPRs) and markets mostly use the MLF rate as a precursor to change in lending benchmarks.

BY THE NUMBERS

The People’s Bank of China (PBOC) said it was leaving the rate on 100 billion yuan ($13.82 billion) worth of one-year MLF loans to some financial institutions at 2.50%.

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

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

Consumer prices rose 0.1% in March from the same month a year earlier, versus 0.7% in February – the first gain in six months – and 0.4% in a Reuters poll.

Signs of loosening in cash conditions reduced demand for MLF loans as the interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, has fallen below the MLF rate. It last traded at 2.0778%.

China is due to release first-quarter gross domestic product data and activity indicators, including retail sales and industrial production, on Tuesday.

CONTEXT

Exports contracted sharply in March whereas imports unexpectedly shrank, undershooting forecasts by large margins, highlighting the task facing policymakers as they try to bolster economic recovery.

New bank lending rose less than markets expected in March from the previous month, while broad credit growth hit a record low.

The yuan has lost about 1.9% in value against the U.S. dollar so far this year, pressured by its relative low yields versus other currencies and outflows of foreign investment from an anaemic stock market.

KEY QUOTES

** RAYMOND YEUNG, CHIEF ECONOMIST FOR GREATER CHINA, ANZ, HONG KONG

“The rate cut expectation is cooling now, as the PBOC has picked other tools such as reserve requirement ratio (RRR) and new relending programs from the toolbox recently.”

** LYNN SONG, CHIEF ECONOMIST FOR GREATER CHINA, ING, HONG KONG

“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.”

($1 = 7.2371 Chinese yuan)

(Reporting by Winni Zhou and Tom Westbrook; Editing by Jacqueline Wong and Christopher Cushing)