PBoC holds medium-term rate but adds liquidity

PBOC holds medium-term lending rate at 2.5%. Market watchers expect rate cuts later in the year.

By Ahmed Azzam | @3zzamous | 15 January 2024

Market open
  • PBoC injects CNY 0.995T, holds rates at 2.50%

  • Asian stocks surge; Nikkei 225 breaks 36,000 mark

  • US holiday today due to Martin Luther King Day

In an unexpected move, the People's Bank of China (PBoC) infused a total of CNY 0.995 trillion through a one-year medium-term lending facility (MLF) into the banking system on Monday, holding the interest rate steady at 2.50%. This strategic financial maneuver follows the expiration of CNY 779 billion in MLF loans this month, resulting in a net fresh fund injection of CNY 216 billion into the banking system. The central bank's decision to sustain its supportive stance comes on the heels of China's banks extending CNY 1.17 trillion in new yuan loans in December 2023—a notable uptick from November's CNY 1.09 trillion, albeit falling short of market expectations set at CNY 1.40 trillion.

In tandem with the MLF injection, the PBoC conducted a seven-day reverse repurchase operation, injecting an additional CNY 89 billion into the financial system while maintaining borrowing costs at 1.8%. The unexpected decision to keep the key medium-term lending facility rate unchanged at 2.5% underscores the central bank's commitment to providing crucial support to the Chinese economy.

Despite the anticipation of a rate cut, the PBoC's move reflects a determination to keep liquidity flowing. Analysts suggest that, given the current economic landscape, the central bank may consider a 10 basis points reduction in the key rate and a 25 basis points cut in the reserve requirement ratio later this quarter.

Most Asian stocks rose in response to the PBoC's decision, with China shares erasing earlier losses. The Nikkei 225 index climbed above 36,000 for the first time since 1990, signaling optimism among investors.

Meanwhile, benchmark Treasuries and the dollar were little changed ahead of the US holiday. Japan’s two-year bond yield slipped below zero for the first time since July.

Today the US is off for Martin Luther King Day which means markets in Europe could well be more subdued than normal, and so far this year there hasn’t been that much to get particularly excited about anyway.