Hector Retamal | Afp | Getty Images China’s central bank kept key interest rates unchanged on Friday in a surprise move, despite expectations for more stimulus as Beijing faces a Covid rise. The People’s Bank of China announced that it keeps the interest rate on its medium-term loan unchanged at 2.85%. The Asian giant is facing the worst Covid outbreak since the start of the pandemic in late 2019, as it locks key cities such as Shanghai. The massive lockdowns sparked forecasts that its GDP growth would fall below the government’s 5.5% target for this year, prompting some economists and analysts to expect interest rate cuts. “The People’s Bank (PBOC) has seized the opportunity to cut interest rates today. This is somewhat surprising, given the sharp economic downturn and recent calls from the Chinese leadership for monetary support,” said Julian Evans-Pritchard, senior China economist at Capital Economics. “Most analysts, including us, were expecting a cut,” he said. Ahead of Friday’s surprise decision, investment firm KraneShares said overnight that Chinese stocks rose on Thursday in anticipation of a reduction in the medium-term lending facility from the Chinese central bank, as well as the required bank reserve ratio. The policy easing “looks like a complete deal,” KraneShares chief investment officer Brendan Ahern said in the note. He cited recent comments from the central bank as saying that the downward pressure on China’s economy has increased due to Covid restrictions. Premier Li Keqiang was also quoted by state media as saying last week that China would step up policy measures to support the economy while considering new stimulus measures. Analysts expected China’s central bank to cut borrowing costs or channel more cash into the economy to boost growth, according to Reuters. The central bank on Friday also did not release any more cash into the system, opting to provide 150 billion yuan ($ 23.5 billion) in medium-term loans. “It underscores the central bank’s reluctance to aggressively relax policy,” Evans-Pritchard said of PBOC’s moves on Friday. “But we believe he will have few options than to do more soon.”
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China’s economic growth is expected to slow to 5% this year as it receives a blow from the renewed Covid epidemic, a Reuters poll showed. This is below the 5.5% government target. However, some analysts have pointed out that China’s central bank has a limited margin for raising interest rates due to the rapid rise in consumer prices. “Rising inflation in food and energy prices is limiting the room for the PBOC to cut interest rates, despite the rapid economic downturn,” Ningura chief economist for China Ting Lu said in a note on Monday. – CNBC Evelyn Cheng contributed to this report.
