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China seen holding medium-term rate steady despite growing economic gloom

China seen holding medium-term rate steady despite growing economic gloom

Reuters · 09/14/2022 00:36
China seen holding medium-term rate steady despite growing economic gloom

- China's central bank is widely expected to pause its monetary easing efforts and keep the medium-term policy rate steady this month, a Reuters survey showed, as widening policy divergence with the Federal Reserve could put further pressure on the Chinese yuan and risk capital outflows.

The People's Bank of China (PBOC) surprised markets in August by lowering key interest rates to revive credit demand and prop up a slowing economy hurt by COVID-19 shocks.

Data since then has pointed to a further loss of momentum, with growing lockdowns weighing heavily on spending and confidence, and the property market mired in a deep slump. Some analysts say the economy could remain weak at least through the end of the year.

But the policy divergence with most other major economies, which are raising interest rates aggressively to combat high inflation, has pressured the yuan CNY=CFXS, which fell more than 3% against the dollar since mid-August to the psychologically important 7 mark.

In a poll of 28 market watchers this week, 27 respondents forecast the interest rate on the one-year medium-term lending facility (MLF) CNMLF1YRRP=PBOC would stay unchanged at 2.75% on Thursday, when the PBOC is anticipated to roll over 600 billion yuan ($86.14 billion) worth of such loans.

Among them, 17 expected the PBOC to partially renew the maturing loans, while the other 10 projected a full rollover.

One participant in the survey predicted a marginal interest rate reduction.

"With the yuan under recent weakening pressure, we don't anticipate the PBOC making any further amendments to its one-year medium-term lending facility rate (this week)," analysts at ING said in a .

Some traders and analysts said authorities may hold off from easing in the term, but they still expect some liquidity injection later this year due to heavy MLF maturity, which totalled 2.6 trillion yuan in the run-up to the year-end.

"We expect more reserve requirement ratio (RRR) cuts in the coming months although we see urgency for more imminent interest rate cuts," said Tommy Xie, head of Greater China research at OCBC Bank.

Xie, along with some market traders, that inflationary pressures in China were very low by global standards, allowing the PBOC more room to manoeuvre on monetary policy if .

Win Thin, global head of currency strategy at Brown Brothers Harriman, said: "We continue to see downside risks to the economic outlook as policymakers are only adding modest stimulus."


($1 = 6.9656 Chinese yuan)




(Reporting by Li Hongwei and Brenda Goh, Writing by Winni Zhou; Editing by Kim Coghill)

((winni.zhou@thomsonreuters.com; +86 21 2083 0100; Reuters Messaging: winni.zhou.thomsonreuters.com@reuters.))