China’s Central Bank Expected to Keep Medium-Term Interest Rate Unchanged

China’s Central Bank Expected to Maintain Interest Rate, Drain Cash from Banking System

In the midst of a sputtering economy and a weak Chinese currency, China’s central bank is expected to keep its medium-term interest rate unchanged and withdraw some cash from the banking system in an effort to stabilize the financial market. A recent Reuters survey of 35 market watchers revealed that 97% of respondents anticipate the People’s Bank of China (PBOC) to maintain the interest rate on the one-year medium-term lending facility (MLF) loan at 2.50%.

The decision to keep the interest rate steady comes as Beijing faces challenges in easing monetary policy due to concerns about the widening yield gap with other major economies, particularly the United States, and the potential for increased capital outflows. Despite the importance of the MLF rate, market participants believe that its significance may diminish as the PBOC focuses on improving the effectiveness of its interest rate corridor.

In addition to maintaining the interest rate, the central bank is expected to conduct a partial rollover of maturing MLF loans, with 80% of poll participants predicting this approach. This strategy aims to gradually reduce the outstanding amount of the facility and address signs of loosening cash conditions in the banking system.

Analysts suggest that the PBOC’s efforts to revamp its monetary policy transmission channel, including selling treasury bonds and introducing measures to cool a bond rally, could help ease upward pressure on the dollar-yuan pair. The central bank’s upcoming monthly fixing of the loan prime rate (LPR) on July 22 will also be closely watched for further insights into its monetary policy direction.

Overall, the PBOC’s decision on the interest rate and cash withdrawal is expected to have significant implications for the Chinese economy and global financial markets. Stay tuned for more updates as the situation unfolds.