China c.bank leaves key policy rate unchanged, as expected

China's central bank left a key policy rate unchanged while withdrawing cash from a medium-term policy loan operation on Friday, as the authorities continued to prioritise currency stability amid uncertainty over the timing of expected Federal Reserve interest rate cuts. The Fed's historic monetary tightening has bolstered the dollar and pressured the yuan over the past few years.

China's central bank left a key policy rate unchanged while withdrawing cash from a medium-term policy loan operation on Friday, as the authorities continued to prioritise currency stability amid uncertainty over the timing of expected Federal Reserve interest rate cuts.

The Fed's historic monetary tightening has bolstered the dollar and pressured the yuan over the past few years. Cutting rates before a move by the Fed or other major central banks would widen yield differentials, potentially putting more pressure on the local currency. The People's Bank of China (PBOC) said it was keeping the rate on 387 billion yuan ($53.80 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.

With 481 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 94 billion yuan fund withdrawal from the banking system. It marked the first cash withdrawal through the liquidity instrument since November 2022. The central bank said the Friday's loan operation has "fully met financial institutions' demand" to maintain banking system liquidity reasonably ample, according to an online statement.

"Net cash withdrawal is an obvious signal, echoing the content of the government work report on preventing idling of funds," said Xing Zhaopeng, senior China strategist at ANZ. "Given major commercial banks have not yet lowered deposit rates again, chances of another policy rate cut are low."

In a Reuters poll of 36 market watchers, 32, or 89%, of all respondents, expected the central bank to keep the borrowing cost of the one-year MLF loans unchanged. The central bank also injected 13 billion yuan through seven-day reverse repos while keeping the borrowing cost unchanged at 1.80%, it said in a statement. ($1 = 7.1932 Chinese yuan)

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