China expected to keep medium-term rate stable despite growing economic gloom

People wearing face masks walk past the headquarters of China’s central bank People’s Bank of China (PBOC), April 4, 2020. REUTERS/Tingshu Wang/File Photo/File Photo

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SHANGHAI, Sept 14 (Reuters) – China’s central bank is expected to halt monetary easing efforts and keep the medium-term policy rate steady this month, a Reuters survey has found, as widening policy divergence with the Federal Reserve could put additional 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 support a slowing economy hit by COVID-19 shocks.

Since then, data has indicated further loss of momentum, with growing lockdowns weighing heavily on spending and confidence, and the housing market mired in a deep recession. Some analysts believe that the economy could remain weak at least until the end of the year. Read more

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But policy divergence with most other major economies, which are aggressively raising interest rates to combat high inflation, has put pressure on the yuan, which has fallen more than 3% against the dollar since the mid-August, near the psychologically important mark of 7.

In a poll of 28 market watchers this week, 27 respondents predicted the interest rate on the one-year medium-term loan facility (MLF) would remain unchanged at 2.75% on Thursday, as the PBOC is expected to defer more than 600 billion yuan ($86.14 billion) of those loans.

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

One survey participant predicted a marginal reduction in interest rates.

“With the yuan under pressure from the recent weakening, we do not expect the PBOC to make any further changes to its one-year medium-term lending facility rate (this week),” analysts said. ‘ing in a note.

Some traders and analysts have said authorities may expect some short-term easing, but they still expect a liquidity injection later this year due to the high maturity of the MLF, which totaled 2.6 trillion yuan at approaching the end of the year.

“We expect further reserve requirement ratio (RRR) cuts in the coming months, although we see no urgency for more imminent interest rate cuts,” said Tommy Xie, head of the research on Greater China at OCBC Bank.

Xie, as well as some market traders, noted that inflationary pressures in China were very low by global standards, leaving the PBOC with more leeway on monetary policy if needed.

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

($1 = 6.9656 Chinese yuan)

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Reporting by Li Hongwei and Brenda Goh, writing by Winni Zhou; Editing by Kim Coghill

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