China seen holding medium-term rate steady despite growing economic gloom

China's central bank is widely expected to pause its monetary easing efforts and keep the medium-term policy rate steady this month, a Reuters survey showed, as widening policy divergence with the Federal Reserve could put further pressure on the Chinese yuan and risk capital outflows.

The People's Bank of China (PBOC) surprised markets in August by lowering key interest rates to revive credit demand and prop up a slowing economy hurt by Covid-19 shocks.

Data since then has pointed to a further loss of momentum, with growing lockdowns weighing heavily on spending and confidence, and the property market mired in a deep slump. Some analysts say the economy could remain weak at least through the end of the year. 

But the policy divergence with most other major economies, which are raising interest rates aggressively to combat high inflation, has pressured the yuan , which fell more than 3% against the dollar since mid-August to near the psychologically important 7 mark.

In a poll of 28 market watchers this week, 27 respondents forecast the interest rate on the one-year medium-term lending facility (MLF) would stay unchanged at 2.75% on Thursday, when the PBOC is anticipated to roll over 600 billion yuan ($86.14 billion) worth of such loans.

Among them, 17 expected the PBOC to partially renew the maturing loans, while the other 10 projected a full rollover.

One participant in the survey predicted a marginal interest rate reduction.

"With the yuan under recent weakening pressure, we don't anticipate the PBOC making any further amendments to its one-year medium-term lending facility rate (this week)," analysts at ING said in a note.

Some traders and analysts said authorities may hold off from easing in the near term, but they still expect some liquidity injection later this year due to heavy MLF maturity, which totalled 2.6 trillion yuan in the run-up to the year-end.

"We expect more reserve requirement ratio (RRR) cuts in the coming months although we see no urgency for more imminent interest rate cuts," said Tommy Xie, head of Greater China research at OCBC Bank.

Xie, along with some market traders, noted that inflationary pressures in China were very low by global standards, allowing the PBOC more room to manoeuvre on monetary policy if needed.

Win Thin, global head of currency strategy at Brown Brothers Harriman, said: "We continue to see downside risks to the economic outlook as policymakers are only adding modest stimulus."