China holds off on policy rate cut despite concerns over economic slowdown, but it’s ‘only a matter of time’

People’s Bank of China (PBOC) keeps rate on 200 billion yuan (US$31.44 billion) worth of one-year medium-term lending facility (MLF) loans unchanged
Rate on the loans to some financial institutions remained at 2.85 per cent despite concerns over a slowdown in the world’s second-largest economy

China's economic recovery

Andrew Mullen

Published: 2:30pm, 15 Mar 2022

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China held off on an anticipated cut to its policy interest rates on Tuesday as headline economic data beat expectations, but it is “only a matter of time” before policymakers take action to support the cooling economy, analysts said.

The People’s Bank of China (PBOC) kept the rate on 200 billion yuan (US$31.44 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.85 per cent.

It had been widely expected that the PBOC would lower the rate for a second time this year, having already cut the rate from 2.95 per cent to 2.85 per cent in January.

But as retail sales, industrial production and fixed-asset investment data also released on Tuesday grew faster than expected, it allowed the PBOC to maintain the rate despite the ongoing crisis in Ukraine and surging coronavirus cases adding to economic headwinds.

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“All three activity-data releases were better than expectations, but the highlight for us was the strength of retail sales. This is even more notable during a period of strict people flow control during the Chinese New Year holidays. This better-than-expected news has enabled the PBOC to hold policy rates steady,” said Iris Pang, chief economist for Greater China at ING.

The move by the PBOC on Tuesday resulted in a net injection of 100 billion yuan in fresh funds, replacing the 100 billion yuan due to mature on Tuesday, with the PBOC attributing the move to “maintaining banking system liquidity reasonably ample”.

The central bank also injected 10 billion yuan through seven-day reverse repos to offset the same amount of such loans due on the same day, while keeping borrowing costs unchanged at 2.1 per cent.

The lack of adjustment also means China’s loan prime rate, which is set as a spread above the MLF rate, is also likely to remain on hold when it is announced on Monday.

With the near-term outlook darkening on multiple fronts, we think it’s only a matter of time before the [PBOC] resumes its rate cuts

Julian Evans-Pritchard

“The People’s Bank (PBOC) remained on hold. But with the near-term outlook darkening on multiple fronts, we think it’s only a matter of time before the [central] bank resumes its rate cuts,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“The PBOC is likely to start cutting rates again before long. The recently concluded annual session of the National People’s Congress signalled that further easing was on the horizon. Since then, the near-term outlook has continued to deteriorate.”

On Monday, it was reported that former central bank adviser Yu Yongding had said that China would further cut interest rates to stabilise the economy.

Yu, a former member of the PBOC’s monetary policy committee, told the China Securities Journal that even if the US Federal Reserve raises its benchmark rate to 2 per cent, the real interest rates would remain negative due to high inflation, in contrast with positive rates in China.

China, which is facing economic headwinds, including from resurgent coronavirus cases at home, a sluggish real estate market and rising geopolitical tensions, has set a growth target of 5.5 per cent for this year.

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On Friday, data also showed that new bank lending in China fell more than expected in February, while broad credit growth slowed, raising pressure on the central bank to ease policy further to support the slowing economy.

In January, China cut its benchmark lending rate for the second consecutive month, while it also lowered a mortgage reference rate for the first time in nearly two years.

The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – was cut from 3.8 per cent in December to 3.7 per cent in January.

And the five-year LPR – which is a reference rate for mortgages – was cut from 4.65 per cent to 4.6 per cent for the first time since April 2020.

The LPR has been considered China’s de facto benchmark funding cost since 2019. The rate is decided by a group of 18 banks and is reported in the form of a spread over the interest rate of the central bank’s MLF.