China’s central bank is expected to keep the policy loan rate unchanged on Tuesday.

China's central bank is expected to keep the policy loan rate unchanged on Tuesday.

China’s Central Bank Expected to Keep Rates Unchanged Despite Economic Slowdown

Shanghai/Singapore, August 14 (ANBLE) – China’s central bank is expected to maintain rates on its medium-term policy loans unchanged, according to a recent ANBLE survey. This decision comes despite growing concerns of a slowing economic recovery. Tumbling credit growth and rising deflation risks in July have called for more monetary easing measures, but the weakening Chinese yuan has limited the central bank’s ability to implement immediate policy changes.

According to analysts at HSBC, “MLF rate cuts are seen as less likely at this juncture given the weakness in the yuan – USD/RMB is currently attempting to make a fresh year-to-date high.”

PBOC’s Decision: No Rate Change

In a recent poll of 26 market watchers, 20 participants (77%) predicted that the central bank would leave the interest rate on its one-year medium-term lending facility (MLF) loans unchanged. This decision coincides with the maturation of 400 billion yuan ($55.11 billion) worth of MLF loans on Tuesday. However, the remaining six participants in the survey expected a marginal rate reduction.

It is important to note that the People’s Bank of China (PBOC) had previously lowered the MLF rate by 10 basis points to 2.65% in June. To gain more insights into the direction of borrowing costs, market participants eagerly await the release of retail sales, industrial output, and investment data on Tuesday.

Yuan’s Struggles and Global Implications

The yuan has experienced a decline of about 5% against the dollar so far this year, making it one of the worst-performing Asian currencies. As China seeks to revive its stalling economy, it finds itself in a unique position among global central banks. While the PBOC has loosened monetary policy, further rate cuts would create a wider yield gap with the United States, leading to increased pressure on the yuan and potential outflows.

Analysts at BofA Global Research believe that additional pro-growth policies are necessary to support economic growth, and they expect further easing of monetary policy. However, they acknowledge limited space for significant easing in the near term due to policymakers’ commitment to maintaining a stable exchange rate at a reasonable level.

Predictions for the Future

Analysts at BofA Global Research anticipate a 15-basis-point cut in the one-year loan prime rate (LPR) during the third quarter of the year. They also suggest the possibility of a reserve requirement ratio (RRR) cut to stimulate credit demand. The MLF rate acts as a guide for the LPR, and the markets often use it as an indicator of potential changes to lending benchmarks.

In the derivatives market, one-year interest rate swaps, which measure investor expectations of future funding costs, fell to 1.90% on Monday. This is the lowest level since October 2022, indicating that some market participants are pricing in further rate reductions.

|$1 = 7.2581 Chinese yuan|

(Source: Reuters)

The outcome of the central bank’s decision and the subsequent economic data will have significant implications for China’s economic recovery and its currency stability. While pressures to ease monetary policy persist, the central bank must also consider the potential consequences of further rate cuts. Striking a delicate balance between fostering growth and maintaining stability remains a key challenge for Chinese authorities.

Disclaimer: The above analysis is based on the information and opinions gathered from trusted sources. Investors should conduct their own research and consult with financial professionals before making any investment decisions.