SHANGHAI/SINGAPORE – The Chinese central bank on Monday extended the maturity of medium-term political loans while leaving the interest rate unchanged, as expected. However, markets believe that monetary easing may be inevitable in the coming months to support the economic recovery.
The People’s Bank of China (PBOC) said it would keep the interest rate at 125 billion yuan ($18.08 billion) for a year medium-term credit facility (MLF) loans to some financial institutions unchanged at 2.75% from the previous operation.
Monday’s operation is intended to fully meet the needs of financial institutions and “maintain reasonably adequate liquidity in the banking system,” the PBOC said in an online statement.
In a Reuters poll of 30 market watchers conducted last week, 26 respondents, or 86.7%, predicted no change in MLF interest rates, while four respondents expected a small rate cut.
The government in December lifted the strict pandemic measures that have led to a revival of credit demand in the world’s second largest economy. However, there are growing concerns that momentum is fading after the initial upswing.
With signs of subdued domestic demand and weak investor sentiment, Beijing will likely need to step up its easing efforts to ensure the economic recovery stays on track.
Some analysts said an upcoming rate cut would put further pressure on lender profitability after the country’s biggest banks saw margins shrink in the first quarter.
“Banks may not be able to cut rates as their net interest margins are close to the 180 basis point warning line.” Xing Zhaopengsaid senior China strategist at ANZ.
“If lending rates are lowered further, there could be financial risks,” he said.
As 100 billion yuan in MLF loans expire this month, the operation resulted in a net infusion of 25 billion yuan in new funds into the banking system.
An online statement said the central bank also injected 2 billion yuan via seven-day reverse repo operations, while borrowing costs remained unchanged at 2.00%.
“We believe that disappointing credit data and rising risks of deflation raise the likelihood of further monetary easing in the form of a rate cut,” Barclays economists said in a note released last week.
“…a holistic approach and a concerted policy effort are needed to stabilize the real estate market and boost consumer and business confidence if authorities are to break the disinflation/deflation cycle.”
They noted that the PBOC appears to prefer adjusting banks’ reserve ratio (RRR) and other structural tools, “but the bottleneck is weak demand and the banking system has ample liquidity,” they added.
The People’s Bank of China (PBOC) said it would keep the interest rate at 125 billion yuan ($18.08 billion) for a year medium-term credit facility (MLF) loans to some financial institutions unchanged at 2.75% from the previous operation.
Monday’s operation is intended to fully meet the needs of financial institutions and “maintain reasonably adequate liquidity in the banking system,” the PBOC said in an online statement.
In a Reuters poll of 30 market watchers conducted last week, 26 respondents, or 86.7%, predicted no change in MLF interest rates, while four respondents expected a small rate cut.
The government in December lifted the strict pandemic measures that have led to a revival of credit demand in the world’s second largest economy. However, there are growing concerns that momentum is fading after the initial upswing.
With signs of subdued domestic demand and weak investor sentiment, Beijing will likely need to step up its easing efforts to ensure the economic recovery stays on track.
Some analysts said an upcoming rate cut would put further pressure on lender profitability after the country’s biggest banks saw margins shrink in the first quarter.
“Banks may not be able to cut rates as their net interest margins are close to the 180 basis point warning line.” Xing Zhaopengsaid senior China strategist at ANZ.
“If lending rates are lowered further, there could be financial risks,” he said.
As 100 billion yuan in MLF loans expire this month, the operation resulted in a net infusion of 25 billion yuan in new funds into the banking system.
An online statement said the central bank also injected 2 billion yuan via seven-day reverse repo operations, while borrowing costs remained unchanged at 2.00%.
“We believe that disappointing credit data and rising risks of deflation raise the likelihood of further monetary easing in the form of a rate cut,” Barclays economists said in a note released last week.
“…a holistic approach and a concerted policy effort are needed to stabilize the real estate market and boost consumer and business confidence if authorities are to break the disinflation/deflation cycle.”
They noted that the PBOC appears to prefer adjusting banks’ reserve ratio (RRR) and other structural tools, “but the bottleneck is weak demand and the banking system has ample liquidity,” they added.
