China Refrains From Rate Cut Despite Economic Challenges

(RTTNews) - China refrained from an interest rate cut on Monday despite the economic challenges as such a move would go against the hawkish stance of global central banks and pose a threat of capital outflow.

After a reduction in May, the People's Bank of China left the five-year loan prime rate or LPR, the benchmark for mortgage rates, unchanged at 4.45 percent.

The rate was lowered by a record 15 basis points in May and by five basis points in January.

The one-year LPR was kept unchanged at 3.70 percent. The previous change in the rate was a five basis points cut in January.

The LPR is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This lending rate replaced the central bank's traditional benchmark lending rate in August 2019.

With the weak economic recovery, rate cuts in the coming months are still likely as the economic recovery would be slow under the Covid-zero policy, ING Economist Iris Pang said.

After this rate pause, the government should hand out more fiscal stimulus as monetary policy is now a secondary policy tool for supporting the economic recovery, the economist added.

In an earlier note, Capital Economics economist Mark Williams said the PBoC has a stronger reason to tread carefully now, with the recent surge in interest rates overseas.

While the PBoC has little to fear from a weaker currency - the renminbi remains extremely strong - the last thing it wants is to have to defend against a sharp potentially destabilising sell-off, Williams noted.

That could plausibly happen if it lowered rates now when almost every other major central bank has turned much more hawkish, the economist added.

Last week, the PBoC injected CNY 200 billion into the system via one-year medium-term lending facility on Tuesday. The interest rate on the MLF was kept unchanged again at 2.85 percent.

The U.S. Federal Reserve on June 15 raised the target rate for the federal funds rate by a larger-than-expected 75 basis points to 1.50-1.75 percent, which was the biggest rate hike since 1994.

The European Central Bank early this month announced its intention to hike the rate by a quarter point in July. The Bank of England raised the rate for the fifth straight session last week.

The Swiss National Bank on June 16 sprang a surprise by lifting its policy rate for the first time since 2007, thus joining its peers in the battle against runaway inflation. However, the Bank of Japan maintained its ultra loose monetary policy.