PBOC leaves medium-term loan rate unchanged

(Sharecast News) - The People's Bank of China surprised markets on Monday by keeping its one-year medium-term lending facility on hold at 2.5%. Analysts were expecting the Bank to announce a 10 basis points cut to 2.4%.

Capital Economics China economist Zichun Huang said: "We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi.

"Admittedly, the currency has been back below 7.20/$ recently. But there are some signs that the PBOC is still intervening to prop up the renminbi, signalling that they remain concerned about the downward pressure on the currency.

"As a result, the PBOC may be prioritising targeted measures, such as PSL injections, to do provide support for the time being."

Pantheon Macroeconomics said this means that the one-year loan prime rate is likely to be kept on hold at 3.45% next Monday.

"A rate cut is still likely in Q1 following the coordinated round of deposit rate cuts started by the big five state-owned banks on December 22, but monetary policy should play second fiddle to fiscal policy in growth support this year," said chief China+ economist Duncan Wrigley.

"Policymakers view weak domestic demand and low confidence as key issues holding back the pace of recovery, but have signalled repeatedly that China will not resort to a mega-stimulus this time."