China's Central Bank Is Likely To Maintain Its Medium-Term Policy Rate At The Monthly Rollover

As China's post-pandemic economic recovery showed signs of faltering, monetary authorities lowered key policy rates last month, and there are expectations for additional policy measures to boost demand in the broader economy.

As a result of a widening yield disparity between the U.S. and China, many market observers now expect policymakers to implement fiscal stimulus measures, as any further interest rate cuts could put additional pressure on the yuan currency.

All 30 market analysts polled this week predicted that the People's Bank of China (PBOC) would maintain the 2.65% interest rate on one-year medium-term lending facility (MLF) loans for Monday's monthly rollover. Last month, the PBOC reduced the rate by 10 basis points.

Twenty-five respondents, or 83%, anticipated that the PBOC's fund offerings would exceed the 100 billion yuan maturing, while the remaining five predicted that the central bank would simply extend all maturing loans.

According to HSBC analysts, the positive surprise in credit data reduced the likelihood of another policy rate cut in the immediate future.

New bank loans in China increased more than anticipated in June compared to the previous month, aided by the central bank's efforts to stimulate the economy.

In a note, OCBC Bank analysts stated, "Monetary policy frequently serves as a precursor to China's intensified macroeconomic support."

"As a result, interest rate reductions are frequently followed by a comprehensive set of macroeconomic policy measures. The meeting of the Politburo in July could cast light on additional fiscal measures."

A senior central bank official stated on Friday that the People's Bank of China (PBOC) will use policy instruments such as the reserve requirement ratio (RRR) and the minimum liquidity requirement (MLF) to weather the challenges confronting the world's second-largest economy.

In addition to retail sales, industrial output, and fixed asset investment figures, China is slated to disclose second-quarter gross domestic product data on Monday.

According to a Reuters poll, China's economy likely grew 7.3% in the second quarter compared to the same period last year, when the nation was still subject to anti-COVID restrictions. However, economists can readily see through the effect of the low base, and they anticipate that the data will support their conclusion that the economic recovery is losing momentum.