China’s central bank halted monetary easing, partially repaid the policy loan, and kept the interest rate unchanged

China’s central bank halted monetary easing, partially repaid the policy loan, and kept the interest rate unchanged

SHANGHAI (Reuters) – China’s central bank renewed a portion of maturing medium-term monetary policy loans while keeping interest rates as expected on Thursday, as the hawkish US Federal Reserve tightened limited monetary policy room to support the economy.

The pause in monetary easing came as bears increased downside pressure on the yuan after the People’s Bank of China (PBOC) surprised markets in August by cutting key interest rates, a move that heightened policy divergence with other major economies aggressively raising rates.

The People’s Bank of China (PBOC) said it kept the one-year medium-term lending facility (MLF) interest rate of 400 billion yuan ($57.46 billion) for some financial institutions unchanged at 2.75% from the previous operation.

With 600 billion yuan of these loans maturing on the same day, this resulted in a net withdrawal of 200 billion yuan from the banking system.

The People’s Bank of China (PBOC) said in an online statement that Thursday’s operation “will keep the banking system’s liquidity reasonably abundant.”

In a survey this week of 28 market observers, 27 participants expected no change in the MLF rate. Of these, 17 expected the People’s Bank of China (PBOC) to partially renew outstanding loans, while the other 10 expected a full renewal.

Xing Zhaopeng, chief China strategist at ANZ, said the pause in monetary easing this month showed that the authorities had been wary of the yuan’s recent depreciation.

“The central bank may continue to keep reasonably ample liquidity, at a relatively high level, while relying on tax credits and fiscal expenditures to offset the infusion of additional funds,” Sheng said.

The People’s Bank of China (PBOC) is expected to cut the reserve requirement ratio for small-scale banks in October to offset quarterly tax payments.

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The yuan has lost more than 3% against the US dollar since mid-August to approach the psychologically important 7 yuan mark.

β€œThe People’s Bank of China is unlikely to take any action that would widen the interest rate differential (between the US and China) in favor of the US currency,” analysts at Maybank said in a note, and they expect a cut of 10-20 basis points in the first period. quarter in 2023 to support the economy.

A widening yield gap could accelerate the yuan’s depreciation and capital outflows.

Some market traders also said the authorities may hold off on easing in the near term, but they expect to inject some liquidity later this year due to the heavy maturity of the multilateral fund, which reached 2 trillion yuan in the fourth quarter.

Marco Sun, chief financial markets analyst at MUFG Bank (China), said the fixed MLF rate, which now serves as a guide to the country’s benchmark loan prime rate (LPR), indicates that the chances of lowering the LPR fixation in September are low. ).

The central bank also injected 2 billion yuan through seven-day reverse repo agreements while keeping the borrowing cost unchanged at 2.00%, the central bank said in an online statement.

The People’s Bank of China (PBOC) surprised markets in August by cutting both rates by 10 basis points to revive credit demand and support the economy affected by the COVID-19 shocks.

(1 dollar = 6.9612)

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