No rate cut expected from the People’s Bank of China in February

Chinese markets are closed today and all of next week for the long Lunar New Year holidays.

Reuters report that the Medium-term Lending Facility (MLF) rate-setting, which normally occurs on the 15th each month, will take place on February 18 this month. February 18 has been designated a makeup working day.

Reuters poll of 31 analysts

  • 22 expect the People’s Bank of China (PBOC) to keep the interest rate on the borrowing cost of the one-year medium-term lending facility (MLF) loans unchanged at 2.5%
  • 9 project a marginal interest rate reduction
  • A total of 499 billion yuan worth of MLF loans are due to mature this month

Given the slow economy and cratering stock markets (that did bounce into the holiday, to be fair), why no PBOC rate cut? Reuters add this:

  • “We are not of the view that the PBOC will implement an MLF rate cut after the week-long holiday,” said Samuel Tse, economist at DBS. “The policymakers are awaiting the first cut from the Fed to maintain a stable yuan exchange rate.”

Yep, its all about the yuan. Capital is fleeing from the Chinese Communist Party and its mercurial approach to policy, an interest rate cut could set up a further run of funds out of the country. Indeed, as I said yesterday, rates are rising in China!

Citi (again, this via Reuters) are expecting a Loan Prime Rate (LPR) cut this month:

  • “Post the Chinese New Year holiday, monetary policies could be more flexible – we are expecting an asymmetric LPR cut this month following the deposit rate cut last December and the 50-basis-point reserve requirement ratio (RRR) cut”
  • “Such a package is unlikely to be a ‘bazooka’ stimulus. However, a timely and carefully implemented package could still be able to set the stage for mild reflation this year.”

The LPR setting will be on February 20.

This article was written by Eamonn Sheridan at www.forexlive.com. Source