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China’s Monetary Policy: A Tightrope Walk by the PBoC

  • The PBoC has maintained its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively, aligning with market expectations.
  • Despite economic challenges and deflationary pressures, the central bank prioritizes stability in its monetary policy approach.
  • The depreciation of the yuan and the impact of policy divergence with the U.S. Federal Reserve limit Beijing's scope for monetary easing.

The People’s Bank of China (PBoC) kept its loan prime rates unchanged on Monday, despite concerns about a potential downturn in the property sector, a slowing economy, and subdued investor sentiment. 

As per the PBoC‘s announcement, both the one-year and five-year lending rates are set to remain unchanged at 3.45% and 4.2%, respectively. This decision aligned closely with expectations, with almost all market watchers predicting that the rates would hold steady. 

This decision follows last week’s unexpected move by the PBoC to keep its medium-term lending facility rate unchanged, signalling a consistent stance. Despite recent data highlighting the uneven nature of China’s economic recovery and deflationary pressures leading to an uptick in real borrowing costs, the central bank has chosen stability.  

Some economists and strategists suggest that Beijing may have limited room for monetary easing, given the downward pressure on the yuan, which has depreciated by over 1% this year, marking its lowest level in two months. 

“The recent USDCNY reference rates suggest that yuan stability is still important to PBoC and rate cuts may only come when the Fed is more ready to cut so that the yuan is not weakened too much by the policy divergence. Our economist still looks for RRR cuts. Potential for easing could still keep the USDCNH supported on dips,” said Saktiandi Supaat, Head of FX research at Maybank. 

Earlier in the month, China’s central bank hinted at its willingness to maintain loose policies by reducing the required reserve amount for banks. This development reinforced investor expectations of additional easing measures in the future.

By CityAM

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