SHANGHAI (Reuters) – China’s central bank is widely expected to keep unchanged the borrowing costs on its medium-term policy loans for the sixth consecutive month on Friday, a Reuters survey showed.
Aggressive global monetary tightening and higher domestic inflationary pressure have limited room for further easing, and analysts and traders believe China’s central bank is poised to steadily normalise its monetary policy after June data indicated the economy had started bottoming out.
In a poll of 29 market watchers conducted this week, all respondents forecast no change in the interest rate on the one-year medium-term lending facility (MLF), which currently stands at 2.85%.
Among them, 22 expected the People’s Bank of China (PBOC) to fully renew 100 billion yuan ($14.84 billion) worth of maturing policy loans due on Friday. But the remaining seven participants predicted a partial rollover after the central bank unexpectedly reduced the daily reverse repo volume this month.
Such a change led the PBOC to make its biggest cash withdrawal from the financial system in three months last week, raising market speculation that policymakers are gradually exiting crisis-mode monetary easing delivered during COVID-19 lockdowns.
“We believe that the PBOC realises that loan demand might not be created just by lowering interest rates,” said Iris Pang, chief economist for Greater China at ING.
“As such, we do not believe that the PBOC will cut policy rates any further, unless there are more prolonged lockdowns,” Pang said, expecting the one-year MLF rate to be unchanged for the remainder of the year.
Some traders noted that the central bank signalled a less accommodative monetary policy in the second half of the year.
When asked about chances of further reduction to banks’ reserve requirement ratio (RRR) and interest rates, the central bank said recent liquidity conditions were already ample and even slightly high.
“This statement signalled PBOC’s focus on maintaining price stability, and is consistent with our view of no further RRR nor interest rate cuts in the second half of this year,” analysts at Goldman Sachs said in a note.
China’s consumer inflation showed an upward trend to increase at the fastest pace in nearly two years in June, albeit below the country’s target of around 3%.
If the MLF rate stays unchanged on Friday, traders said it could indicate no adjustment to the country’s lending benchmark loan prime rate (LPR), which is loosely pegged to the medium-term policy rate. The LPR fixing is due next Wednesday.
Separately, China is also scheduled to release its second-quarter gross domestic product (GDP) and activity indicators on Friday, with analysts forecasting GDP to have been just 1% higher than a year earlier.
($1 = 6.7400 Chinese yuan)
(Reporting by Steven Bian and Brenda Goh; Writing by Winni Zhou; Editing by Christopher Cushing)
