China Holds Rates Steady as Expected

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China’s central bank, the People’s Bank of China (PBOC), maintained a key policy rate unchanged on Monday while rolling over maturing medium-term loans and withdrawing some funds from the banking system. This decision aligns with market expectations, given the constraints of narrowing interest margins and a weakening currency, which limit Beijing’s ability to ease monetary policy to support the world’s second-largest economy.

The medium-term lending facility (MLF) rate, which guides the loan prime rates (LPRs), remained steady. The market often views the MLF rate as an indicator of potential changes in lending benchmarks. The next monthly fixing of the LPRs is scheduled for Thursday.

The PBOC announced it would keep the rate on 182 billion yuan ($25.08 billion) of one-year MLF loans to certain financial institutions unchanged at 2.50%. This was consistent with the previous operation. In a Reuters poll of 31 market analysts, 30 (97%) anticipated that the PBOC would leave the MLF rate unchanged.

Net interest margin, a measure of lenders’ profitability, narrowed to 1.54% in the last quarter from 1.69% in the previous three months. Additionally, China’s yuan has depreciated by more than 2.1% against a strengthening U.S. dollar this year, pressured by its relatively low yields compared to other economies.

While China still has room to lower interest rates, its capacity to adjust monetary policy faces both internal and external constraints, according to industry experts cited by the official Financial News.

Economists at Goldman Sachs noted that the slow pace of government bond issuance and weak private sector credit demand have led to ample front-end liquidity recently. This reduces the urgency for the PBOC to cut the reserve requirement ratio (RRR) in the near term. Consequently, Goldman Sachs has postponed its monetary easing forecast by one quarter and now expects the PBOC to implement a 25-basis-point RRR cut in the third quarter and a 10-basis-point policy rate cut in the fourth quarter.