China holds rates, adds more liquidity as recovery struggles

SHANGHAI/SINGAPORE (Reuters) -China’s central bank rolled over maturing medium-term policy loans while keeping the interest rate unchanged on Monday, as expected, but markets expect monetary easing may be inevitable in the coming months to support the economic recovery.

The People’s Bank of China (PBOC) said it was keeping the rate on 125 billion yuan ($18.08 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.75% from the previous operation.

Monday’s operation was meant to fully meet financial institutions’ needs and to “maintain reasonably ample banking system liquidity,” the PBOC said in an online statement.

In a Reuters poll of 30 market watchers conducted last week, 26 participants, or 86.7%, predicted no change to the MLF rate, while four respondents expected a marginal rate cut.

The government lifted stringent pandemic measures in December that have started to rekindle credit demand in the world’s second-largest economy, but there are growing concerns that momentum is slowing after the initial bounce.

With evidence of subdued domestic demand and weak investor sentiment, Beijing will likely have to ramp up its easing efforts to ensure the economic recovery stays on track.

Some analysts said an imminent rate cut would add further pressure on lenders’ profitability after the country’s largest banks recorded shrinking margins in the first quarter.

“It may not be possible for banks to cut as their net interest margins are close to the warning line of 180 basis points,” Xing Zhaopeng, senior China strategist at ANZ, said.

“If loans rates are further lowered, that could trigger financial risks,” he said.

With 100 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 25 billion yuan fresh fund injection into the banking system.

The central bank also injected 2 billion yuan through seven-day reverse repos while keeping borrowing costs unchanged at 2.00%, it said in an online statement.

“We think disappointing credit data and rising deflation risks increase the probability of more monetary policy easing in the form of an interest rate cut,” economists at Barclays (LON:) said in a note published last week.

“….a holistic approach and concerted policy efforts are needed to stabilise the housing market and boost consumer and business confidence if authorities are to break the disinflation/deflation spiral.”

They noted that the PBOC appeared to prefer adjusting banks’ reserve requirement ratio (RRR) and other structural tools, “but the bottleneck is weak demand and the bank system is flush with liquidity,” they added.

($1 = 6.9121 )

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