China’s central bank left a key interest rate steady for the 10th straight month, displaying caution on monetary easing given abundant liquidity and pressure to prevent the yuan from weakening further. 

The People’s Bank of China kept the rate on one-year policy loans, the so-called medium-term lending facility (MLF), steady at 2.5% on Monday, in line with the forecast in a Bloomberg survey. It withdrew a net 55 billion yuan (US$7.6 billion or RM35.77 billion) from the banking system to avoid excessive liquidity.

The decision reflects financial authorities’ preference for currency stability over lower borrowing costs, despite a fragile recovery in the world’s second-largest economy. Beijing’s restraint may pare market bets for monetary easing that have kept local bond yields near a two-decade low. 

Authorities have refrained from outright rate cuts, with an eye towards keeping the yuan a “powerful currency”, even as voices calling for a cut grow louder. Last week, the onshore yuan slipped to the weakest level since November, weighed down by a wide US-China rate gap. 

Sufficient market liquidity also keeps authorities on the sidelines, reflected in cheaper borrowing costs of a popular debt instrument. The rate on one-year AAA-rated negotiable certificates of deposits dropped to around 2%, compared with the MLF’s 2.5%. The inflows from savings to wealth management products and other higher-yielding assets pumped in cash into the financial system.

China’s economy has undergone a patchy recovery. Exports climbed more than expected in May, while inflation rose less than expected. But factory activity surprisingly contracted last month, according to an official survey. Despite accelerated government bond sales to boost infrastructure spending, the years-long property slump continues unabated.

  - Bloomberg