China's central bank holds steady on key policy rate amid economic uncertainty

The People's Bank of China (PBOC) maintained its key policy rate on Wednesday, opting to keep the rate for its medium-term lending facility (MLF) unchanged.

This decision comes as per the market expectations and reflects the central bank's focus on maintaining currency stability amidst economic challenges.

The PBOC announced that it would keep the rate on 125 billion yuan ($17.28 billion) of one-year MLF loans at 2.50 per cent, consistent with the previous operation.

Analysts suggest that the central bank's move to hold the MLF rate steady underlines its priority to stabilise the yuan, despite recent economic signals that might warrant more aggressive policy stimulus.

China has seen an unexpected credit contraction in April, adding to arguments for increased support to strengthen the world's second-largest economy.

This decision comes just days before the finance ministry is set to release the first batch of 1 trillion yuan in ultra long-term special treasury bonds.

The timing is important as it indicates the central bank's cautious approach to monetary policy amid bigger economic pressures.

The Chinese yuan has depreciated by approximately 1.9 per cent against the US dollar this year, influenced by relatively low yields compared to other global economies.

This depreciation adds another layer of complexity to China's monetary policy decisions as it balances internal economic support with external currency stability.

In late April, the Communist Party's Politburo indicated that Beijing would enhance economic support through various monetary and fiscal policies.

These measures include potential cuts in interest rates and bank reserve requirement ratios (RRR), signalling a proactive stance to stimulate economic growth.

Economists at ING noted the combination of low inflation, credit contraction, slowing money supply growth, and weak private sector investment as strong indicators for the need for rate cuts.

They suggested that real interest rates remain too high and that RRR cuts are losing their effectiveness.

However, they also pointed out that stabilising the currency has been a significant consideration this year, with policymakers likely preferring to wait for global rate cuts before initiating their own.

(With inputs from Reuters)