China's central bank kept its key policy rates unchanged on Monday, indicating a likely hold on the benchmark lending rate later this month.
The People's Bank of China provided 182 billion yuan ($25.09 billion) worth of funds to some financial institutions via its medium-term lending facility, which will charge banks an interest rate of 2.5%, unchanged from the previous operation.
This compared with a maturing loan of CNY237 billion due this month, suggesting a net drain of CNY55 billion from the banking system amid the central bank's drive to tackle excessive liquidity.
The central bank also offered CNY4 billion funds via seven-day reverse repos to banks at an interest rate of 1.8%, also unchanged from its earlier operation.
The hold on the medium-term lending rate indicates that the benchmark loan prime rate will likely be the same as it was last month since lenders price their prime loans using the medium-term lending rate. The PBOC will release its loan prime rate on Thursday.
The Monday rate announcement came after official data released last week showed Chinese banks issued a smaller-than-expected amount of loans in May, signaling a continued weakness of credit demand amid a protracted property slump.
The hold on the key policy rate was widely expected as Chinese banks' narrowing profit margins stoked concerns about the stability of the financial sector. Some economists say a policy rate cut would offer limited benefits amid tepid borrowing demand from Chinese households and companies.
A weakened Chinese yuan, as well as a wide gap between yields offered in China and the U.S., continue to limit Beijing's options, economists say.
China still has room to lower interest rates, but such cuts face internal and external constraints, the PBOC-run newspaper Financial News said in an article published hours before the rate release, citing unnamed experts.
"Policymakers could still be in the stage of observing the effect of the latest round of easing before any new effort," Citi economist Xianrong Yu said in a Monday note.
Still, economists expect Beijing to loosen its monetary policy in the second half of the year to better support the economy, employing tools such as trimming policy rates and slashing the amount of deposits banks have to set aside at the central bank.
With all the monetary policy constraints at play, fiscal policy has been widely expected to play a leading role in propping up the Chinese economy this year. "In terms of policy support, we see an ongoing shift in government policy from monetary easing towards fiscal stimulus to bolster domestic demand," Serena Zhou, a senior China economist at Mizuho Securities in Hong Kong, told clients in a note last week.
Beijing last month began sales of the first batches of a planned CNY1 trillion in ultralong bonds, with central authorities urging local governments to speed up their bond sales.
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(END) Dow Jones Newswires
06-16-24 2247ET
