Central Bank of China supports liquidity and leaves rate unchanged

The Central Bank of China has extended the maturity of medium-term loans. However, the interest rate remains unchanged for the second month in a row. This fact reinforces expectations that conditions on bank loans will stay loose, which will help China's economy, hit by the pandemic.

The People's Bank of China (PBOC) has kept its one-year medium-term lending (MLF) rate at 2.75%, costing the bank 500 billion yuan ($69.6 billion).

The statement of NCB says that Monday's liquidity injection was aimed at maintaining sufficient liquidity in the banking system and fully meeting demands of financial institutions.

 In August and September, the PBOC drained a net of 200 billion yuan. According to Marco Sun, chief financial market analyst at MUFG Bank, this is a sign that the Central Bank of China will continue to maintain loose monetary policy. The analyst also noted the fact that China's economy has faced relatively severe problems this year.

According to a Reuters poll, China's third-quarter GDP data is likely to highlight the worsening challenges the country is facing amid weak domestic demand and a slowdown in global growth. China's GDP data is due on Tuesday.

Financial analysts and traders said that credit data for August reduced the urgent need for an interest rate cut. At the same time, the weakening of the currency limits the ability of the PBOC to conduct monetary policy.

While inflationary pressures in China remain largely benign by global standards, monetary divergence could lead to depreciation of the yuan and capital flight.

According to Erin Xin, a Greater China economist, further monetary easing will continue, although the PBOC will be aware of pressure due to monetary policy differences with the US Federal Reserve.

The economist concludes that additional easing is likely to come through further liquidity support.

The MLF rate serves as a benchmark for the Loan Prime Rate (LPR), which is scheduled to be published on Thursday.

Some traders say the annual LPR rate is likely to remain unchanged, while the five-year rate could be cut following a series of measures taken to support a struggling real estate market.