China's central bank left the medium-term policy rate unchanged on Monday, defying market expectations for a cut as a weaker currency limited the scope of monetary easing in the near term to boost the economy.
A slew of recent indicators continued to reflect the country's uneven economic recovery, with a pick-up in exports in December but weak credit growth and persistent deflationary pressure calling for more stimulus measures.
However, a narrowing interest rate margin at commercial banks and a weakening Chinese yuan have limited the room for the People's Bank of China (PBOC) to maneuver, and rate cuts may be postponed until later this year, some market watchers said.
On Monday, PBOC said it was keeping the rate on 995 billion yuan ($138.84 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.
"We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi," economists at Capital Economics said in a note.
The yuan has weakened more than 1% against the dollar so far this year to a more than one-month low due to uncertainty around when the U.S. Federal Reserve will start cutting interest rates.
Capital Economics continued to forecast two 10-basis-point rate cuts by the end of the second quarter and a reduction to the reserve requirement ratio (RRR).
Monday's loan operation was to fully meet cash demand at financial institutions to "maintain reasonably ample liquidity in the banking system," the central bank said in an online statement.
Those expectations grew after major Chinese commercial banks lowered their deposit rates late last year, and after recent disappointing economic data stoked the view that more stimulus was warranted.
Economists at ANZ said PBOC might have held off cutting rates as "authorities may be concerned about bank profitability".
With the steady medium-term policy rate, some market watchers now expect a reduction to the banks' reserve requirement to release fresh funds to boost credit and growth.
The operation on Monday resulted in a net 216 billion yuan fresh fund injection into the banking system, with 779 billion yuan worth of MLF loans set to expire this month.
"We continue to see quantitative and liquidity measures as the main policy focus," said Frances Cheung, rates strategist at OCBC Bank.
"With this morning's decision where the net MLF injection was not huge, market expectation for an RRR cut shall stay high."
Investor expectations of a cut in the reserve requirement came after Zou Lan, monetary policy department head of PBOC, highlighted RRR as a monetary policy option to support credit growth, according to a state media report last week.
Seasonal factors could also delay monetary easing, as financial institutions usually have to assess their profitability and their clients' loan appetite for 2024 ahead of the Lunar New Year holiday, which starts on Feb. 10, said Marco Sun, chief financial markets analyst at MUFG Bank (China).
He maintained a forecast for a 20-basis point reduction in the PBOC's policy rate later in 2024.
Data due this week for December industrial output, investment and retail sales, along with fourth-quarter gross domestic product will give investors clues on whether the economy will need further support.
($1 = 7.1665 Chinese yuan)
