China keeps medium-term policy rate unchanged, but markets expect further easing

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The headquarters of the People’s Bank of China, the central bank, is pictured in Beijing, China, as the country is hit by an outbreak of the novel coronavirus, February 3, 2020. REUTERS/Jason Lee

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SHANGHAI, April 15 (Reuters) – China’s central bank kept borrowing costs for its medium-term political loan unchanged for the third consecutive month as expected on Friday, despite Beijing’s call for more monetary stimulus to cushion an economic downturn.

The People’s Bank of China (PBOC) said it was keeping the rate on 150 billion yuan ($23.52 billion) of one-year medium-term loans (MLFs) to certain financial institutions unchanged at 2.85 % over the previous operation, to “maintain reasonably sufficient liquidity in the banking system,” according to an online statement.

Thirty-one of 45 traders and analysts, or nearly 70% of all respondents to a Reuters poll, expect no change in the MLF rate.

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Instead, markets are increasingly expecting an imminent reduction in the amount of cash banks must set aside as reserves, after the Council of State, or cabinet, on Wednesday called for the timely use of these monetary tools.

Global investment banks, including Citi, expect such a reserve requirement ratio (RRR) cut to be implemented as early as Friday, with many expecting further easing measures. are still in progress.

“We doubt the next RRR cut will be the last easing measure either, given the headwinds facing the Chinese economy,” said Julian Evans-Pritchard, senior economist at Capital Economics.

“We continue to expect a further 20 basis point cut in policy rates this year and a further acceleration in credit growth.”

The recent rapid spread of COVID-19 cases has caused lockdowns in a dozen cities across the country, including the financial hub of Shanghai, raising concerns about wider disruptions to economic activity.

That means policymakers will have to come up with more stimulus to ensure the economy is on track to meet the growth target of around 5.5% this year, analysts said.

A latest Reuters poll showed China’s economic growth is expected to slow to 5.0% in 2022 amid fresh COVID-19 outbreaks and a weakening global recovery, putting pressure on the central bank to to relax its policy further. Read more

With 150 billion yuan of MLF loans maturing on Friday, the operation resulted in no net injection of liquidity into the banking system.

The central bank also injected 10 billion yuan through seven-day reverse repos while keeping the cost of borrowing unchanged at 2.1 percent, according to an online statement.

($1 = 6.3775 Chinese Yuan)

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Reporting by Winni Zhou and Andrew Galbraith; Editing by Muralikumar Anantharaman and Lincoln Feast.

Our standards: The Thomson Reuters Trust Principles.

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