China keeps medium-term policy rate unchanged, but markets expect more easing

The People's Bank of China (PBOC) said it was keeping the rate on 150 billion yuan ($23.52 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.85% from the previous operation, to "maintain banking system liquidity reasonably ample", according to an online statement.

Thirty-one out of the 45 traders and analysts, or nearly 70% of all participants in a Reuters poll, forecast no change to the MLF rate.

Instead, markets increasingly expect an imminent reduction in the amount of cash banks must set aside as reserves, after the State Council, or cabinet, called on Wednesday for the timely use of such monetary tools.

Global investment banks including Citi expect such a reserve requirement ratio (RRR) reduction could be delivered as early as Friday, with many expecting more easing measures still on the way.

"We doubt the forthcoming RRR cut will be the last easing move either, given the severe headwinds facing China's economy," said Julian Evans-Pritchard, senior China economist at Capital Economics.

"We continue to anticipate another 20 basis points of policy rate cuts this year and a further acceleration in credit growth."

The recent fast spread of COVID-19 cases has induced lockdowns in a dozen of cities across the country, including the financial hub of Shanghai, raising concern over wider disruptions to economic activity.

That means policymakers will need to offer more stimulus to ensure the economy is on course to hit this year's growth target of around 5.5%, analysts say.

A latest Reuters poll showed China's economic growth is likely to slow to 5.0% in 2022 amid renewed COVID-19 outbreaks and a weakening global recovery, piling pressure on the central bank to ease policy further.

With 150 billion yuan worth of MLF loans maturing on Friday, the operation resulted in zero net cash injection into the banking system.

The central bank also injected 10 billion yuan through seven-day reverse repos while keeping the borrowing cost unchanged at 2.1%, according to an online statement.

($1 = 6.3775 Chinese yuan)

Reuters