(Bloomberg) -- China’s central bank kept its one-year policy rate unchanged, after slashing funding costs by the most on record a month ago, suggesting authorities are cautiously pacing monetary stimulus to support the economy.
The People’s Bank of China kept the interest rate on the medium-term lending facility steady at 2% while draining a net 89 billion yuan ($12.5 billion) for October, according to a statement Friday. All but one of the 15 economists polled by Bloomberg predicted the rate would remain unchanged.
Beijing reduced the cost on the funding facility by an unprecedented 30 basis points late September, although the rate is being replaced by a shorter-term one as the main lever to guide markets as part of the monetary authority’s recent overhaul of its policy tools.
Traders are zeroing in on any stimulus measures China has to offer, after PBOC Governor Pan Gongsheng last month announced outsized cuts to rates and the reserve requirement ratio in a blockbuster press briefing. Those moves can free up cash for banks to lend, helping the economy to meet its growth goal of around 5% this year.
“This is largely in line with market expectations, both the unchanged rate and a small net withdrawal,” said Xiaojia Zhi, chief China economist at Credit Agricole SA. “But it doesn’t mean that the PBOC is not supportive of liquidity.”
The offshore yuan slipped 0.1% against the dollar on Friday morning, while the onshore yuan was steady. The 10-year yield was little changed at 2.16%.
The 30-year bond yield climbed one basis point to 2.36%, while 30-year bond futures dropped 0.2%.
The central bank is likely to roll out more policy easing steps such as a RRR cut in the coming month, according to Zhi. The size of the reduction could be 50 basis points again, as a total of 2.9 trillion yuan of MLF funds will mature in the next two months while the government may issue more bonds, she said.
Pan reiterated last week that the central bank may cut the RRR by 25 to 50 basis points by the end of the year depending on market liquidity conditions.
Opinions on the potential window for the next interest rate cut are more divided. Some believe the PBOC may wait until early next year to cut rates again in order to avoid putting too much pressure on the yuan. Others have flagged the possibility of a move in the rest of this year to counter headwinds such as a deterioration in market sentiment if Donald Trump wins the US presidential election.
Serena Zhou, senior China economist at Mizuho Securities Asia Ltd., forecast a 20-basis-point cut to the seven-day reverse repo rate — now regarded as the main policy rate — by the year’s end, along with additional fiscal stimulus to support domestic demand.
Further rate cuts may add to Beijing’s efforts to revive growth, including measures to support the ailing housing sector. A stimulus package announced since late last month has prompted a stock rally, although global monetary and financial officials believe more needs to be done to rebalance the economy as well as to tackle weak domestic demand and overcapacity.
China’s economy expanded at the slowest pace in six quarters in the three months ended in September, despite early signs of improved consumption during the final weeks of the period.
On Friday, the PBOC added 700 billion yuan of cash with MLF as 789 billion yuan of funds came due.
The net withdrawal reflects banks’ reduced demand for cash after the previous RRR cut, as well as the fact that the MLF’s cost at 2% is still higher than market rates and other PBOC tools, analysts said.
The PBOC has embarked on an overhaul of its policy toolkit since June with the goal of operating it similarly to global peers to influence markets more effectively.
As part of the shift, the central bank has been sidelining the MLF as the main lever for adjusting interest rates or providing liquidity. Instead, it’s laid out plans to replace the MLF for that role with seven-day reverse repurchase agreements, which are conducted daily to manage short-term liquidity by buying government securities from lenders and selling them back after a week.
First introduced in 2014, the MLF allows qualified banks to access loans from the PBOC by pledging collateral such as high-grade bonds. It became one of the main ways for the central bank to pump cash into a rapidly expanding economy and ensure there was the right amount of liquidity in the market.
The PBOC has run a regular monthly MLF operation since early 2019. Until the latest revamp, the MLF used to anchor banks’ benchmark loan prime rates, which affect borrowing costs for households and companies.
--With assistance from Iris Ouyang, Qizi Sun and Wenjin Lv.
(Updates with additional details.)
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