China Central Bank holds back on rate cut, disappointing economists

The People's Bank of China opted to roll over the 150 billion yuan (S$32 billion) of loans maturing in the medium-term lending facility. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's central bank refrained from cutting interest rates and injecting liquidity into the economy on Friday (April 15), disappointing analysts who had expected more forceful action to cushion growth from worsening Covid-19 outbreaks.

The focus now shifts to a possible reduction in the reserve requirement ratio (RRR) for banks, a move that would give lenders cheap funding to spur loans and growth in the economy.

The State Council, China's Cabinet, hinted strongly on Wednesday of a reduction in the RRR. The People's Bank of China (PBOC) kept the rate on its one-year policy loans at 2.85 per cent on Friday.

Only six of the 22 economists surveyed by Bloomberg had predicted the decision, with a majority expecting a reduction of five to 10 basis points.

The PBOC also refrained from injecting extra liquidity into the financial system, opting instead to roll over the 150 billion yuan (S$32 billion) of loans maturing in the medium-term lending facility.

Economists had expected a net injection of 100 billion yuan. China's 10-year government bond yield rose as much as two basis points to 2.77 per cent after the announcement, while the offshore renminbi traded in a tight range of around 6.39 per dollar.

The benchmark CSI 300 Index erased earlier losses to trade little changed as at 10.42am on Friday, having rallied 1.3 per cent on Thursday amid expectations of a rate cut. The liquidity sensitive ChiNext Index slid 1 per cent.

Market participants are anticipating an imminent reduction in the RRR.

Senior central bank officials said at a press briefing on Thursday that the tool would be used at the "proper time".

"We think the central bank may follow up with a 50-basis point RRR cut today," said Ms Liu Peiqian, China economist at NatWest Group.

The PBOC may want to avoid "excessive easing that may fuel a renewed round of debt surge", she added.

Growth projections for China have been steadily downgraded this year as Covid-19 lockdowns spread, with economists now expecting economic expansion of 5 per cent in 2022, below the government's target of around 5.5 per cent.

Top officials including Premier Li Keqiang have repeatedly warned about the outlook as lockdowns in major cities like Shanghai disrupt production and spending.

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