SHANGHAI, June 17 — China’s central bank left a key policy rate unchanged as expected on Monday when rolling over maturing medium-term loans, and drained some funds from the banking system.

Why it’s important

The steady MLF rate comes in line with market expectations, as narrowing interest margins and a weakening currency remain key constraints limiting Beijing’s scope to ease monetary policy to support the world’s second-largest economy.

The MLF rate serves as a guide to the loan prime rates (LPRs) and markets mostly use the MLF rate as a precursor to any changes to the lending benchmarks. The monthly fixing of LPRs is due on Thursday.

By the numbers

The People’s Bank of China (PBOC) said it was keeping the rate on 182 billion yuan (US$25.08 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50 per cent from the previous operation.

In a Reuters poll of 31 market watchers, 30, or 97 per cent, of all respondents expected the PBOC to leave the interest rate on MLF rate unchanged.

Net interest margin, which measures lenders’ profitability, narrowed to 1.54 per cent in the quarter from 1.69 per cent in the previous three months.

China’s yuan has lost more than 2.1 per cent against a resurgent US dollar so far this year, pressured by its relative low yields versus other economies.

Context

China still has room to lower interest rates, but its ability to adjust monetary policy faces internal and external constraints, the official Financial News said, citing industry experts.

Key quotes

"The slow pace of government bond issuance and weak private sector credit demand have led to ample front-end liquidity recently, reducing the urgency for the PBOC to cut the reserve requirement ratio (RRR) in the near term,” economists at Goldman Sachs said in a note.

"We push back our monetary easing forecast by one quarter, and now expect the PBOC to deliver one 25-basis-point RRR cut in Q3 and one 10-basis-point policy rate cut in Q4.” — Reuters