China held benchmark lending rates at the monthly level on Monday, in line with expectations that Beijing has limited scope for monetary easing amid downward pressure on the yuan.
The decision was made after the People’s Bank of China surprised markets last week by maintaining the rate on the medium-term lending facility.
The decisions were made despite recent data highlighting the uneven nature of China’s economic recovery and deflationary pressures driving up real borrowing costs.
Julian Evans-Pritchard, head of China economics at Capital Economics, said policymakers “appear to have lingering concerns” about the yuan.
“A cut at this stage could trigger further devaluation pressure, something the central bank wants to avoid. It is therefore possible that it will stick to quantitative easing tools for now,” he said, citing the promised additional loans as an example.
The one-year Prime Loan Interest Rate (LPR) was kept at 3.45%, while the five-year LPR rate remained unchanged at 4.20%.
In a Reuters poll of 27 market watchers last week, all but one predicted both LPRs would remain unchanged.
Most new and outstanding loans in China are based on the one-year LPR rate, while the five-year rate influences the price of mortgages.
Downward pressure on the yuan has resurfaced in the new year, with the currency pressured by a strengthening dollar on signs of resilience in the U.S. economy and caution that the Federal Reserve may take longer than some expected to reduce taxes.
The onshore yuan has lost about 1.3% since the beginning of the year, hitting its weakest level in two months.
Source: Terra
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