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China seen keeping medium-term rate unchanged as yuan skids

China’s central bank is widely expected to keep borrowing costs on its medium-term policy loans unchanged next Monday, a Reuters survey showed, despite massive pressure on the economy from protracted COVID-19 lockdowns in many cities.

A rapid weakening yuan and aggressive U.S. Federal Reserve tightening have fueled worries about potentially destabilizing capital outflows if China rolls out more forceful stimulus measures, limiting policy maneuvering room, analysts say.

Thirty-one out of 39 traders and analysts, or nearly 80% of all participants polled by Reuters on Friday, forecast no change in the interest rate on one-year medium-term lending facility (MLF) when the central bank is set to renew 100 billion yuan ($14.74 billion) worth of such loans on Monday.

Of the remaining respondents, seven predicted a marginal cut of 5 basis points (bps), while one saw a potential 10 bps cut.

The People’s Bank of China (PBOC) is likely to “fully roll over the maturing MLF loans while keeping the rate unchanged,” said Zhou Hao, senior economist at Commerzbank, noting domestic inflation also picked up recently.

Consumer prices rose at their fastest pace in five months in April as widespread COVID-induced lockdowns across major cities hit supplies of household items, while factory-gate inflation remained elevated.

Han Wenxiu, deputy head of the party’s office for financial and economic affairs, said this week that China will not hesitate to introduce new policies to prop up growth.

Market analysts and traders said a recent slide in the yuan could be another concern for authorities’ hesitation in rolling out more monetary easing, which could put more depreciation pressure on the currency.
China’s yuan touched a more than 19-month low against the dollar on Friday, and has lost more than 6% over the past four weeks, a sudden, deep plunge for the currency that has long been tightly managed and usually moves within thin ranges.
Moreover, some analysts note more aggressive easing now may not help much in the near-term as officials stick to their strict zero-COVID stance and many workers and factories remain locked down.
Source: Reuters (Reporting by Steven Bian and Andrew Galbraith, Writing by Winni Zhou; Editing by Kim Coghill)

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