China central bank set to leave key rate unchanged on Friday

Paramilitary police officers stand guard in front of the headquarters of the People’s Bank of China, the central bank (PBOC), in Beijing, China Sept 30, 2022. REUTERS/Tingshu Wang/File photo

China’s central bank is expected to leave a key policy rate unchanged when it rolls over maturing medium-term loans on Friday, a Reuters survey showed, amid uncertainty over the timing of expected Federal Reserve interest rate cuts.

Market watchers widely believe Beijing will continue to prioritize the stability of the yuan, despite widespread views that the struggling economy needs more stimulus.

Cutting rates before a move by the Fed or other major central banks would widen yield differentials, potentially putting more pressure on the currency, which has depreciated 1.3 percent against the dollar so far this year despite persistent central bank efforts to shore it up.

In a Reuters poll of 36 market watchers conducted this week, 32, or 89 percent, of respondents expected the People’s Bank of China (PBOC) to keep the interest rate on one-year medium-term lending facility (MLF) loans unchanged at 2.50 percent when rolling over 481 billion yuan ($66.86 billion) worth of such loans.

READ: China’s rate cuts hold key to recovery —experts

The remaining four participants projected a marginal interest rate reduction.

“We maintain our view that the PBOC will not front-run the Federal Reserve for a policy rate cut,” said Samuel Tse, economist at DBS.

“After all, the authority aims at stabilizing the exchange rate to forestall further capital outflows. Stabilizing economic data also leaves room for a delayed rate cut decision.”

The Fed is widely expected to cut interest rates this year if inflation cools, and markets now see a 65-percent chance of a rate cut in June, though that has edged down from 71 percent earlier in the week, according to LSEG’s rate probability app. The likelihood of a July rate cut sits around 83 percent.

China may have to wait for Fed move

A Fed rate cut or series of cuts would offer leeway for its Chinese counterpart to lower borrowing costs to prop up economic growth, traders and analysts said.

READ: China central bank leaves key policy rate unchanged under shadow of Federal Reserve

“China’s policy rate adjustment may have to wait until when the timing of the U.S. interest rate cut becomes clear,” said a bond fund manager in Beijing, expecting the PBOC to fully roll over the maturing MLF loans and even offer some fresh funds into the financial system on Friday.

However, PBOC Governor Pan Gongsheng said last week the bank would keep the yuan basically stable and sent a dovish message to the market by saying China had “rich monetary policy tools at its disposal.”

“We expect more monetary policy easing in China to support growth,” economists at Barclays said in a note.

“We expect a 10-basis-point cut in the policy rate in both Q2 and Q3, and look for a 25-50 bps cut in banks’ reserve requirement ratio (RRR) in Q2 and another 25-50 bps RRR cut in Q3.”

($1 = 7.1942 Chinese yuan)