China unlikely to cut major policy rate amid inflation, yuan pressure as ‘risk versus reward doesn’t seem attractive’
- People’s Bank of China (PBOC) is set to leave the rate on its one-year policy loans – the medium-term lending facility (MLF) – steady at 2.5 per cent
- Calls are mounting for Beijing to do more for the economy as consumer prices fall, but concerns about yuan volatility are seen to have tied the PBOC’s hands
China’s central bank is poised to keep cash conditions and monetary policy broadly stable as policymakers focus on a weakening currency.
The People’s Bank of China (PBOC) will leave the rate on its one-year policy loans – called the medium-term lending facility (MLF) – steady at 2.5 per cent as soon as Sunday, according to the median estimate in a Bloomberg survey of analysts.
Most of the analysts see either a small increase in the MLF issuance, or little changed from the loans maturing this month. Some 499 billion yuan (US$69.8 billion) worth of loans are due to expire.
The PBOC is expected to hold its liquidity operations on the first working day after the Lunar New Year holiday ends, which would be Sunday.
The risk versus reward of a MLF cut now doesn’t seem attractive.
The central bank last month disappointed investors expecting the first cut in MLF since August.
“It seems too rushed to cut MLF rates” barely two weeks after the RRR cut, said Becky Liu, head of China macro strategy at Standard Chartered.
“It may have limited impact in terms of lowering loan rates, but greater negative implication on yuan. The risk versus reward of a MLF cut now doesn’t seem attractive.”
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China’s sluggish economy and diverging monetary policy from the US is heaping pressure on the local currency.
The offshore yuan sank to a three-month low against the US dollar Tuesday as traders pared bets of an early pivot by the US Federal Reserve following stronger-than-expected inflation data.
Keeping the MLF steady for a sixth straight month may have its risks as sentiment worsens on weakening demand, property market turmoil and capital outflows.
The situation might be dire enough for the central bank to lower the lending rate as early as possible, according to analysts at Everbright Securities and Mizuho Securities.
MLF rate cut is still necessary, but the timing could be later considering currency stability, while market continue to adjust their expectation of Fed rate cut
“A cut can’t be ruled out but that’s not our base case,” said Michelle Lam, Greater China economist at Societe Generale SA. “The PBOC may wait for further evidence on growth slowdown.”
Policymakers have ramped up support in recent weeks amid a rout in the nation’s stock market, but more steps may be needed.
“MLF rate cut is still necessary, but the timing could be later considering currency stability, while market continue to adjust their expectation of Fed rate cut,” said Xiaojia Zhi, head of research at Credit Agricole CIB.
The “concern” is measures taken by China to support the economy may not be “aggressive enough to imminently turn around the market sentiment”.
