(Bloomberg) -- China’s central bank abstained from cutting a key policy interest rate, avoiding further policy divergence from the US that could add pressure on the yuan.
The People’s Bank of China kept the rate on its one-year medium-term lending facility at 2.85% on Wednesday. Sixteen of the 22 surveyed by Bloomberg had predicted no change, while the rest saw a reduction of either five or 10 basis points.
The decision came hours before US officials may consider a hike of as much as 75 basis points, the biggest interest-rate increase since 1994. Policy divergence from the US has wiped out China’s yield premium over US Treasuries, sparking capital outflows and driving the yuan lower.
China has refrained from aggressive monetary easing measures in recent months as interbank liquidity was ample amid sluggish corporate and consumer demand for credit. Policy makers have instead opted for more targeted lending tools and faster fiscal spending to bolster an economy grappling with a housing market slump and Covid lockdowns.
Key economic indicators to be released Wednesday are expected to show continued declines in retail sales and industrial output for May after April’s contractions.
The central bank on Wednesday rolled over the 200 billion yuan ($29.7 billion) of the MLF loans maturing, in line with the forecasts of most economists polled. The funds will allow banks to buy more government bonds as a record 623 billion yuan worth of local notes will be issued this week to finance infrastructure spending, Bloomberg-compiled data shows.
The focus now shifts to a possible reduction in the loan prime rate Monday. Banks reduced the de facto benchmark rate for long-term loans including mortgages last month after the PBOC lowered the floor for mortgage rates, though borrowing demand remained subdued in May.
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