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February 27, 2024

China’s Central Bank Surprises by Keeping Key Lending Rate Unchanged

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Jan 15, 2024

China’s central bank surprised markets on Monday by keeping its medium-term lending rate unchanged, even as the economy slows. However, the People’s Bank of China (PBOC) did inject liquidity into the financial system.

PBOC Keeps Policy Rate Steady

The PBOC maintained its one-year medium-term lending facility (MLF) rate at 2.75% on Monday. This key interest rate influences China’s Benchmark lending rate, which affects corporate loans.

Economists were widely expecting the PBOC to cut rates by 10 or 20 basis points to support the economy. However, the central bank decided to keep rates steady for now.

China Lending Rate/cloudfront-us-east-2.images.arcpublishing.com/reuters/ZWJQ23T6TROWHK4JH3I6YCBT24.jpg)

China’s central bank surprised markets by keeping its key lending rate unchanged. (Photo: Reuters)

Liquidity Injections Continue

Although the MLF rate was left unchanged, the PBOC said it injected 500 billion yuan ($74 billion) into the banking system through the liquidity tool.

This exceeded the 400 billion yuan of such loans maturing on Monday, meaning a net liquidity injection into the interbank market.

The PBOC also injected 10 billion yuan via seven-day reverse repurchase agreements, offsetting the same amount of such short-term loans due on the day.

Action Amount Impact
Rollover of MLF loans 400 billion yuan Rollover of existing liquidity
New 1-year MLF loans 500 billion yuan Net liquidity injection of 100 billion yuan
Rollover of 7-day repos 10 billion yuan Rollover of existing liquidity

Markets React Cautiously

Chinese stocks and the yuan currency gave up some early losses after the lending rate decision, although most markets were struggling for clear direction.

The surprise decision suggested policymakers may be pausing to assess earlier easing measures, analysts said.

“The decision reflects that policymakers intend to stay patient while evaluating the impact from a raft of easing measures introduced late last year,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

However, economists still expect further monetary easing this year if China’s economic downturn persists.

There is room for the PBOC to cut interest rates further, as well as reduce banks’ reserve requirement ratios (RRR), to free up more funds for lending.

Outlook Remains Gloomy

China’s economy grew just 3% in 2022, far below the official target of around 5.5%, as strict COVID curbs and a property crisis took their toll.

The government abruptly dismantled its zero-COVID policy in early December, leading to a wave of infections that disrupted businesses and weighed on consumer spending.

Still, many analysts say China’s economy has yet to turn the corner. Consumption and production data for December suggested economic activity was broadly deteriorating as infections surged.

More policy support is needed to stabilize the economy, according to analysts. While standing pat on rates for now, the PBOC is likely to cut borrowing costs further in coming months if the downturn continues.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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