China's central bank left a key policy rate unchanged while withdrawing cash from a medium-term policy loan operation on Friday, as authorities continued to prioritise currency stability amid uncertainty over the timing of expected Federal Reserve interest rate cuts.
The Fed's historic monetary tightening has bolstered the dollar and pressured the yuan over the past few years. Cutting rates before a move by the Fed or other major central banks would widen yield differentials, potentially putting more pressure on the local currency.
The People's Bank of China (PBOC) said it was keeping the rate on 387 billion yuan ($53.80 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.
With 481 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 94 billion yuan fund withdrawal from the banking system. It marked the first cash withdrawal through the liquidity instrument since November 2022.
The central bank said the Friday's loan operation has "fully met financial institutions' demand" to maintain banking system liquidity reasonably ample, according to an online statement.
"Net cash withdrawal is an obvious signal, echoing the content of the government work report on preventing idling of funds," said Xing Zhaopeng, senior China strategist at ANZ.
"Given major commercial banks have not yet lowered deposit rates again, chances of another policy rate cut are low."
China has set an ambitious 2024 economic growth target of around 5%, promising steps to transform the country's development model and defuse risks fuelled by bankrupt property developers and indebted cities.
PBOC Governor Pan Gongsheng said last week the bank would keep the yuan basically stable and sent a dovish message to the market by saying China had "rich monetary policy tools at its disposal."
Investors have since ramped up their bets authorities will roll out more monetary easing measures, including a further reduction to bank reserves, to support the world's second-largest economy.
The MLF operation "may suggest that a reserve requirement ratio (RRR) cut is forthcoming," said Frances Cheung, rates strategist at OCBC Bank.
"There may be an intention to replace part of MLF with liquidity released from an RRR cut. After all, there have been strong hints from officials of an RRR cut."
The central bank also injected 13 billion yuan through seven-day reverse repos while keeping the borrowing cost unchanged at 1.80%, it said in a statement.
($1 = 7.1932 Chinese yuan)
