China’s central bank adhered to market expectations on Monday by keeping its medium-term lending facility (MLF) rate unchanged while rolling over maturing loans. This decision, maintaining the rate at 2.50% for one-year MLF loans totaling 100 billion yuan ($13.8 billion), reflects Beijing’s cautious approach amid challenges posed by narrowing interest margins and currency pressures.
The move comes as 103 billion yuan of MLF loans were set to expire this month, resulting in a net fund withdrawal of 3 billion yuan from the banking system. Simultaneously, the People’s Bank of China injected 129 billion yuan through seven-day reverse repos at an unchanged borrowing cost of 1.80%.
China’s yuan has depreciated by 2.3% against the US dollar this year, influenced by its relatively lower yields compared to other global economies. In response, the PBOC has introduced a new cash management tool aimed at stabilizing short-term market rates around the seven-day reverse repo rate, signaling a strategic shift in monetary policy management.
According to PBOC Governor Pan Gongsheng, the seven-day reverse repo rate now serves a pivotal role akin to the main policy rate, as the central bank seeks to enhance the effectiveness of its interest rate framework. Despite speculation among industry experts about potential interest rate adjustments, considerations are weighed against the impact on both domestic net interest margins and the yuan’s exchange rate resilience.
Moving forward, the significance of the MLF rate is expected to gradually diminish as the PBOC continues to refine its interest rate corridor strategies. The central bank affirmed that the MLF loans effectively met the demand from financial institutions, underscoring its efforts to balance liquidity management amidst economic uncertainties.
As China navigates these challenges, the PBOC remains vigilant in its approach to monetary easing, mindful of both domestic financial stability and global economic dynamics.
