China holds key rate steady in cautious approach to stimulus

China drains cash via key funding tool for first time since 2022

China’s central bank left its key policy rate unchanged and drained cash from the banking system, extending its approach of drip-feed stimulus for the country’s economy amid pressure on the local currency.

The People’s Bank of China kept the rate on its one-year policy loans steady at 2.5% on Friday, as expected by most economists surveyed by Bloomberg. It net withdrew 94 billion yuan ($13 billion) cash from the banking system to avoid excessive liquidity.

The rate decision will likely disappoint investors and economists who anticipate more stimulus is needed for the government to achieve its ambitious economic growth target of around 5% for this year.

It also underscores the PBOC’s limited scope in further easing monetary policy — given a wide US-China interest rate differential — before the Federal Reserve’s policy pivot.

Investors have been expecting rate cuts in China this year as the world’s second largest economy struggles with deflationary pressures, a years-long property crisis and sluggish demand. The US-China rate differential also has hammered its currency and exacerbated capital outflows amid a weaker-than-expected economic recovery.

The Chinese yuan has fallen around 1% so far this year despite consistent support by the authorities, as expectations of a Fed rate cut as early as the first quarter have been rolled back due to resilient US inflation. Investors’ bets on more easing in China boosted their frenzy over the nation’s sovereign debt, driving yields to around two-decade low.