On Monday, the People’s Bank of China (PBOC) decided to keep its medium-term lending facility (MLF) rate unchanged at 2.0%. This rate applies to 900 billion yuan ($124.26 billion) in one-year loans to financial institutions.
The decision comes amid increasing pressure on the yuan, which has depreciated following Donald Trump’s victory in the U.S. presidential election. Analysts had anticipated this move, given the ample liquidity in China’s financial system and the current economic conditions.
By keeping the MLF rate steady, the PBOC preserves flexibility for future policy adjustments, particularly in response to potential changes under the new U.S. administration.
Commercial banks in China have faced narrowing net interest margins, with overall margins dropping to 1.53% in September, which is below the level needed for reasonable profitability. This makes it important for the PBOC to balance economic support with maintaining financial stability, especially as external pressures such as the U.S. dollar’s strength continue to influence the market.
The offshore yuan has seen a significant decline, losing over 2% since the U.S. election, and about 3.3% since China launched its initial stimulus measures in late September.
China’s Central Bank Maintains Lending Rate Amid Yuan Depreciation and Global Economic Pressures
Many experts believe that the PBOC will hold off on additional interest rate cuts in the short term, as further reductions could exacerbate the yuan’s depreciation. Instead, analysts like Zhiwei Zhang suggest the central bank will likely opt for a gradual depreciation of the yuan to avoid causing excessive market volatility.
Looking ahead, analysts expect that the PBOC may reduce the reserve requirement ratio (RRR) for commercial banks in the coming months. This move would be aimed at easing financial conditions and supporting economic recovery, while also ensuring that the yuan remains relatively stable.
Additionally, there is speculation that the central bank might lower the reverse repo rate by 20 basis points before the end of the year, depending on liquidity needs and market conditions at that time.
Unlike the U.S. Federal Reserve, which primarily focuses on adjusting the main interest rate, the PBOC uses a variety of tools to manage China’s monetary policy. The central bank’s recent decisions, including the unchanged loan prime rates and the steady MLF rate, reflect a cautious and measured approach to economic challenges.
By carefully balancing the need for economic support with the goal of maintaining financial stability, the PBOC aims to address both domestic and external pressures without creating sudden disruptions in the market.
