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In a bid to stabilize the yuan and manage liquidity, the People’s Bank of China has decided to keep its key interest rate unchanged for the tenth consecutive month.
What Happened: The PBOC has maintained the one-year policy loan rate, also known as the medium-term lending facility rate, at 2.5% for the tenth month in a row on Monday, reported Bloomberg.
This decision aligns with the forecast in a Bloomberg survey. The bank also withdrew a net 55 billion yuan ($7.6 billion) from the banking system to prevent excessive liquidity.
Despite a fragile recovery in the world’s second-largest economy, the PBOC has chosen to prioritize currency stability over reducing borrowing costs. This cautious approach may dampen market expectations for monetary easing, which have kept local bond yields near a two-decade low.
Despite growing calls for a rate cut, the PBOC has refrained from implementing one, aiming to maintain the yuan as a strong currency. The recent weakening of the onshore yuan, attributed to a significant U.S.-China rate gap, has not prompted the PBOC to alter its stance, according to the report.
Why It Matters: Market liquidity, coupled with cheaper borrowing costs for popular debt instruments, has also influenced the PBOC’s decision. The rate on one-year AAA-rated negotiable certificates of deposits has dropped to approximately 2%, compared to the MLF’s 2.5%.
This has led to an influx of cash into the financial system from savings to wealth management products and other higher-yielding assets.
China’s economy has experienced a mixed recovery, with higher-than-anticipated exports in May and lower-than-expected inflation. However, official surveys indicate a surprising contraction in factory activity last month, and the long-standing property slump continues despite increased government bond sales to boost infrastructure spending.
The decision by the PBOC to maintain its key rate comes at a time when China is under increasing international scrutiny. The country’s industrial capacity and its support for Russia’s war efforts were key topics at the recent G7 summit in Italy, with Western governments expressing concerns about China’s policies.
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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote
