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China central bank keeps medium-term policy rate unchanged, market expects LPR reduction

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SHANGHAI — China’s central bank rolled over maturing medium-term policy loans while keeping the interest rate unchanged for a fourth straight month as expected on Monday, but markets still expect easing measures to prop up the economy.

The People’s Bank of China (PBOC) said it was keeping the rate on 100 billion yuan ($14.7 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.85%, offseting the same amount of such loans due on the same day.

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Despite the steady MLF rate, markets still expect some monetary easing and stimulus measures to arrest a slowing domestic economy, which has been hurt by COVID-19 lockdowns. Latest official data also showed industrial output contracted in April and missed market forecasts by a big margin.

Monday’s liquidity move was designed to “keep banking system liquidity reasonably ample,” the PBOC said in an online statement.

Thirty-one out of 39 traders and analysts, or nearly 80% of all participants in a Reuters poll, had forecast no change to the MLF rate, noting that a weakening yuan and a pick up in consumer prices was giving the central bank less room for monetary policy easing.

China’s yuan has lost more than 6% against the dollar in the past four weeks, the steepest drop in decades. Persistent dollar strength and surging U.S. yields might continue to pressure the Chinese currency.

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Aggressive monetary easing in China, such as lowering the reserve requirement ratio (RRR) and key policy rates, would further separate its policy stance from other major economies, which have started tightening, and potentially trigger more capital outflows.

Still, some investment banks, including UBS, expect the lending benchmark loan prime rate (LPR), which is loosely pegged to the MLF rate, could be lowered at the monthly fixing on Friday, as a cut to banks’ RRR in April and deposit rate ceiling effectively reduced lenders’ liability cost.

Citi analysts said sluggish credit lending data in April also strengthened the case for a modest cut to the upcoming LPR fixing.

“Overall, we still think the PBOC is likely to rely more on structural and quantity tools as well as macro prudential assessment (MPA) review and window guidance to drive credit growth,” they said in a note on Sunday.

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Separately, Chinese financial authorities on Sunday allowed a further cut in mortgage loan interest rates for some home buyers, in another push to prop up its property market and revive a flagging engine of the world’s second-largest economy.

Larry Hu, chief China economist at Macquarie, said the reduction to the mortgage rate floor was far from enough to turn the property sector around and he expected more property easing to follow.

“Moreover, given the weak economic data, another LPR cut could happen soon, after the cut in January,” Hu said in a note.

Under the current rate mechanism, the five-year LPR influences the pricing of mortgages, while most new and outstanding loans in China are based on the one-year LPR.

($1 = 6.7880 yuan) (Reporting by Winni Zhou and Andrew Galbraith; Editing by Kenneth Maxwell and Christopher Cushing)

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