May 29, 2024

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In an unexpected move, China refrained from cutting its key interest rate

In an unexpected move, China refrained from cutting its key interest rate

The city of Shanghai, where many foreign companies are based, entered a two-part lockdown this week as municipal authorities sought to control the outbreak of China’s worst Covid wave in two years.

Hector Ritaml | Afp | Getty Images

China’s central bank kept its key interest rate unchanged on Friday in a surprise move, despite expectations of more stimulus as Beijing struggles with the COVID-19 surge.

The People’s Bank of China said it kept the one-year medium-term loan rate unchanged at 2.85%.

The Asian giant is facing its worst outbreak of Covid since the start of the pandemic in late 2019, as it shuts down major cities such as Shanghai.

The mass shutdowns have raised expectations that GDP growth will fall below the government’s 5.5% target for this year, leading some economists and analysts to expect an interest rate cut.

“The People’s Bank (PBOC) missed the opportunity to cut its policy rates today. This is somewhat surprising given the severe economic downturn and recent calls from the Chinese leadership for monetary support,” said Julian Evans-Pritchard, chief China economist at Capital Economics.

“Most analysts, including us, expected a cut,” he said.

Ahead of Friday’s surprising decision, investment firm KraneShares said in an overnight note Chinese stocks rose Thursday In anticipation of the Chinese central bank cutting the medium-term loan facility, as well as the bank’s reserve requirement ratio and the base loan rate.

KraneShares’ chief investment officer Brendan Ahern said in the note that the easing policy “looks like a done deal.” He cited recent comments from the central bank that said the downward pressure on the Chinese economy had increased, driven by Covid restrictions.

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The state media also cited Prime Minister Li Keqiang He also said last week that China would step up policy measures to support the economy while looking at new stimulus. Analysts had expected the Chinese central bank to cut borrowing costs or inject more liquidity into the economy to stimulate growth, According to Reuters.

Also on Friday, the central bank did not release more liquidity into the system, opting to transfer more than 150 billion yuan ($23.5 billion) of medium-term lending facility loans.

“It underscores the central bank’s reluctance to do too much policy,” Evans-Pritchard said of the People’s Bank of China’s moves on Friday. “But we think it will have no choice but to do more soon.”

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China’s economic growth is seen as likely to slow to 5% for this year as it takes a hit from the renewed Covid outbreak, A Reuters poll showed. This is below the government’s target of 5.5%.

However, some analysts pointed out that the Chinese central bank has limited scope to increase interest rates due to the rapid rise in consumer prices.

“Rising food and energy price inflation limits the scope for the People’s Bank of China to cut interest rates, despite the rapidly deteriorating economy,” Nomura’s chief China economist Ting Lu said in a note on Monday.

CNBC’s Evelyn Cheng contributed to this report.