Saturday , May 14 2022
China holds interest rates steady despite COVID, Ukraine woes

China holds interest rates steady despite COVID, Ukraine woes

The People’s Bank of China keeps one-year loan prime rate at 3.7 percent and the five-year rate at 4.6 percent.

China held key interest rates for corporate and household loans steady on Wednesday, a surprise move that signals Beijing remains cautious about policy easing even as COVID-19 and the Ukraine war weigh on growth.

The People’s Bank of China (PBOC) kept the one-year loan prime rate at 3.7 percent and the five-year rate at 4.6 percent.

Most economists, including a majority of the 28 traders and analysts surveyed in a snap poll by the Reuters news agency this week, had expected the central bank to cut rates amid slowing economic growth due to COVID-19 lockdowns and the conflict in Europe.

The central bank’s benchmark rates respectively affect the cost of new and outstanding loans and mortgages.

“At this stage China may take a wait-and-see approach given the uncertainties such as the COVID-19 situation and its impact on the economy,” Heng Wang, an expert in the Chinese economy at the University of New South Wales, told Al Jazeera.

“These considerations may include how such lending rates would boost the economy in an efficient way. The control of inflation and debt is an important issue.”

Monetary easing

While central banks in North America, Europe and Asia are raising interest rates to tame soaring inflation, China has rolled out easing measures in order to prop up growth.

The PBOC on Friday cut the amount of deposits banks must hold in reserve – known as reserve requirement ratio (RRR) – releasing about 530 billion yuan ($82bn) of liquidity into the economy while keeping its medium-term policy rate unchanged. The 0.25 percentage point RRR cut was widely seen as falling short of market expectations.

Carlos Casanova, senior economist for Asia at UBP in Hong Kong, said the decision to keep rates steady had been foreshadowed by the modest RRR cut and the decision to keep the medium loan rate unchanged.

“PBOC is likely concerned that cutting rates at this juncture would do little to support activity given that many cities around the country are subject to varying degrees of lockdown measures,”  Casanova told Al Jazeera.

“Moreover, with China’s rate differential with the US effectively eradicated following rapidly rising yields in the US, PBOC might be concerned about a mistiming of policy stimuli. This could result in portfolio outflows and yuan depreciation without the desired impact on growth.”

Casanova said policymakers could opt for modest rate cuts in May or June after the effect of lockdowns had become clear, or rely on more targeted measures such as RRR cuts and mortgage rate cuts.

“The second scenario is more likely but will result in fewer upside risks in the second half,” he said.

China’s economy grew 4.8 percent year on year in the first quarter, according to government data released on Monday. While beating forecasts, the figure covers just a small period of the ongoing lockdown in Shanghai, which has caused food shortages and rare displays of civil unrest. Industrial output increased 5 percent in March compared with a year earlier, according to the data, while retail sales shrank 3.5 percent.

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