China's Central Bank Holds Rates, Adds More liquidity

On Monday, China's central bank rolled over maturing medium-term policy loans while leaving interest rates unchanged, as predicted, although markets anticipate monetary easing in the coming months to boost the economic recovery.

The People's Bank of China (PBOC) announced that it will maintain the rate on 125 billion yuan ($18.08 billion) in one-year medium-term lending facility (MLF) loans to selected financial institutions at 2.75 percent, unchanged from the previous operation.

The operation on Monday was designed to fully meet the needs of financial institutions while also "maintaining reasonably ample banking system liquidity," according to a PBOC statement posted online.

In a recent poll of 30 market observers, 26 participants, or 86.7 percent, forecast no change in the MLF rate, while four predicted a marginal rate drop.

The government relaxed severe pandemic controls in December, reviving lending demand in the world's second-largest economy, but there are mounting signs that momentum is fading after the first boost.

With evidence of poor domestic demand and investor pessimism, Beijing will almost certainly need to step up its easing measures to keep the economy on pace.

"It may not be possible for banks to cut because their net interest margins are close to the warning line of 180 basis points," said Xing Zhaopeng, senior China analyst at ANZ.

"If loan rates are further reduced, financial risks may arise," he warned.

The exercise resulted in a net 25 billion yuan additional money infusion into the banking sector, with 100 billion yuan of MLF loans slated to expire this month.

According to an online statement, the central bank also injected 2 billion yuan through seven-day reverse repos while maintaining borrowing costs unchanged at 2.00 percent.