- On Tuesday, China kept its benchmark interest rates unchanged in the monthly setting, as expected, as the authorities apparently decided to postpone immediate monetary easing following the rapid fall in the local currency and while central banks in other countries hardened their positions.
The decision came a few days before the Federal Reserve’s monetary policy meeting in September, at which the US central bank is expected to make another interest rate hike to curb rising prices.
The growing divergence between the monetary policies of the world’s two largest economies could stoke fears of capital flight from China, just as Beijing tries to muster resources to revive its slow growth.
The one-year LPR loan rate remained unchanged at 3.65%, while the five-year LPR remained unchanged at 4.30%.
In a Reuters poll this week, 21 of 28 respondents, or 75% of the participants, did not foresee any change in either type.
The fixing of long-term interest rates came after the People’s Bank of China (PBOC) kept its medium-term interest rate unchanged last week, while draining some of the liquidity from the banking system.
The medium-term lending facility (MLF) borrowing cost serves as a guide to the LPR, and markets typically use the medium-term rate as a precursor to any changes in loan benchmarks.
“This shouldn’t come as a surprise as the MLF rate was previously unchanged,” said Frances Cheung, rate strategist at OCBC Bank.
“However, benchmark interest rates reflect the overall funding costs of banks, which have some wiggle room with deposit rates trending down,” added Cheung, noting that some of China’s largest banks cut personal deposit rates last week to ease pressure on margins.
Analysts say policymakers are carefully seeking the balance between supporting a slowing economy and not creating new economic risks.
Beijing’s policy divergence from most other major economies, which are aggressively raising interest rates to control inflation, has piled pressure on the currency and limited room for further monetary easing.
China cut benchmark interest rates in August as Beijing stepped up efforts to revive an economy weighed down by the housing crisis and a resurgence in COVID-19 cases.
But those rate cuts have accelerated the yuan’s decline. The currency has lost about 4% against the dollar since mid-August, passing the psychologically important mark of 7 per dollar and raising risks of capital outflows.
“Direct rate cuts have always been one of the PBOC’s options and the weakness of the yuan has further reduced the possibility of a rate cut,” said OCBC’s Cheung to GLM.