May 15, 2022
China Keeps Key Interest Rate Unchanged Despite Sharp Economic Slowdown
(Bloomberg) -- China’s central bank refrained from cutting interest rates despite mounting evidence of a sharp slowdown in economic growth, suggesting policy makers may be concerned about the currency’s depreciation and capital outflows.
The People’s Bank of China kept the rate on its one-year policy loans at 2.85% on Monday. Economists had been split on the decision, with 13 of the 25 surveyed by Bloomberg expecting no change, and the rest predicting a reduction between 5 basis points and 15 basis points.
The PBOC also rolled over the maturing 100 billion yuan ($15 billion) of medium-term lending facility loans without providing additional liquidity.
Officials have expressed concerns about inflation pressure and capital outflows as the Federal Reserve and other major economies begin hiking interest rates. Foreign outflows from Chinese bonds reached a record in March as China’s yield premium over the US disappeared. The yuan has depreciated about 6.6% against the dollar since the end of March, making it the worst performing currency in Asia during the period.
The PBOC’s stimulus has been relatively modest this year. It cut the MLF rate in January and made a smaller-than-expected reduction in the amount of cash banks must keep in reserve in April. Policy makers have relied instead on using structural tools to target weaker areas of the economy, such as relending programs for small businesses.
On Sunday, the central bank took steps to ease a housing crunch by reducing the lower-bound range of mortgage interest rates for first-time homebuyers. That follows data on Friday showing a plunge in home loans in April.
Authorities also announced a phased reopening of shops in Shanghai after a six-week lockdown. Covid lockdowns in major cities and stringent curbs in many other places are disrupting factory operations, cutting consumer spending and snarling supply chains. Economic indicators to be released later Monday will show the extent of the damage in April.
The Covid restrictions are reducing the effectiveness of monetary stimulus, with data Friday showing companies and consumers have little appetite to borrow. Credit growth weakened sharply in April, with new yuan loans sinking to the lowest level since December 2017.
Policy divergence between China and the US is set to continue. Deputy PBOC Governor Chen Yulu has said loan rates have been guided lower and new policy tools are planned to support the economy. Meanwhile, Federal Reserve Chair Jerome Powell reaffirmed the US central bank is likely to raise rates by 50 basis points at each of its next two meetings.
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