In a surprise move, China holds back from cutting key interest rates

The capital Shanghai, home to many foreign businesses, was forced to close for two parts this week as the city government sought to control the outbreak of China’s worst Covid-19 wave in two years.

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China’s central bank left its key interest rate unchanged on Friday in a surprise move, despite expectations of more stimulus as Beijing grapples with the rise of Covid.

The People’s Bank of China said it was keeping its one-year medium-term loan interest rate unchanged at 2.85%.

The Asian giant is facing its worst Covid outbreak since the start of the pandemic in late 2019, when it closed key cities like Shanghai.

The mass shutdowns have fueled predictions that the country’s GDP growth will fall below the government’s 5.5% target this year, prompting some economists and analysts to expect a cut. interest rates.

“The People’s Bank of China (PBOC) had an opportunity to lower its policy rate today,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Most analysts, including us, were expecting a cut,” he said.

Ahead of Friday’s unexpected decision, investment firm KraneShares said in an overnight note that Chinese stocks rose Thursday in anticipation of China’s central bank cutting its medium-term lending facility, as well as the bank’s reserve ratio and lending prime rate.

Policy easing “feels like a done deal,” KraneShares Chief Investment Officer Brendan Ahern said in the note. He cited recent comments from the central bank that said downward pressure on the Chinese economy had increased, due to Covid restrictions.

Premier Li Keqiang was also quoted by state media as said last week that China will strengthen policy measures to support the economy while considering new stimulus measures. Analysts had expected China’s central bank to lower borrowing costs or pump more cash into the economy to spur growth. according to Reuters.

The central bank on Friday also did not release more cash into the system, choosing to lend more than 150 billion yuan ($23.5 billion) in medium-term loans.

“It underscores the central bank’s reluctance to aggressively ease policy,” Evans-Pritchard said of the PBOC’s moves on Friday. “But we think it will have no choice but to do more than before.”

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China’s economic growth is expected to slow to 5% this year as it suffers a shock from the new Covid outbreak, a Reuters poll found. This is below the government’s target of 5.5%.

However, some analysts point out that China’s central bank has limited room to raise interest rates due to rapidly rising consumer prices.

“Rising food and energy price inflation limits the space for the PBOC to cut rates, despite the rapidly deteriorating economy,” Nomura chief economist Ting Lu said in a note on Wednesday. Two.

– Evelyn Cheng of CNBC contributed to this report.

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