China's central bank kept key policy rates unchanged on Monday, indicating a likely hold on the country's benchmark lending rate later this month even as signs of economic weakness raise expectations that easing may be in the pipeline.
The People's Bank of China injected 100 billion yuan, or about $14 billion, worth of funds into the financial system via its medium-term lending facility, which will charge banks an interest rate of 2.5%. The rate has been unchanged for 11 straight months.
Given that CNY103 billion worth of loans were due this month, the moves imply a net drain of CNY3 billion from the banking system. This marks the fifth consecutive month that the central bank has refrained from injecting liquidity via the lending facility as it looks to downplay the policy instrument's role in guiding markets.
The PBOC also offered a net injection of CNY127 billion via seven-day reverse repurchases to banks at rate of 1.8%, also unchanged from its previous operations.
This morning's hold signals that China's benchmark loan prime rate will likely be held steady, since lenders use the medium-term lending rate to price loans. The next loan prime rate announcement is due Monday.
The moves come after data Friday showed China's credit growth hit a record low in June, a traditionally strong month for loans as banks look to meet lending targets at the end of the quarter.
Economists had widely expected the hold, as the PBOC looks to keep the yuan steady. Like other central banks, PBOC could be watching for the start of Federal Reserve rate cuts before embarking on its own easing cycle. A rate cut could widen the gap between yields offered in China and the U.S., adding more depreciation pressure to the yuan.
Chinese banks' narrowing profit margins pose another concern, with some economists arguing that further rate cuts would do little to boost the economy amid tepid borrowing demand from households and corporations.
But a recent run of soft economic data may be adding pressure on the PBOC to ease, said Lynn Song, ING's chief Greater China economist. "The coming months' data will be important to see if the PBOC can indeed afford to wait until the Fed's move," Song said in a note.
In either case, with PBOC Gov. Pan Gongsheng signaling his intention to let a single short-term rate guide markets, the MLF rate's role is likely to be gradually dialed down, analysts say. The instrument has become less effective at guiding markets in recent months as banks' demand for 1-year policy loans weakens due to cheaper interbank borrowing costs amid ample liquidity.
Authorities have also introduced overnight repo and reverse repo operations to better manage liquidity and effectively consolidate the 7-day reverse repo rate's role as the new policy benchmark.
The MLF could also play a smaller role in injecting liquidity into the market, which would be offset by the PBOC's restart of government bond purchases, Nomura economists said in a recent note.
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(END) Dow Jones Newswires
07-15-24 0310ET
