Thursday, July 7 2022

Metropolis Shanghai, home to many foreign businesses, entered a two-part shutdown this week as city officials sought to control an outbreak in China’s worst wave of Covid in two years.

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China’s central bank kept a key interest rate unchanged on Friday in a surprise move, despite expectations of further stimulus as Beijing grapples with a Covid surge.

The People’s Bank of China said it was keeping its one-year medium-term loan rate unchanged at 2.85%.

The Asian giant is facing its worst Covid outbreak since the pandemic began in late 2019 as it locks down key cities like Shanghai.

The massive shutdowns have prompted forecasts that its GDP growth will fall below the government’s target of 5.5% for this year, prompting some economists and analysts to expect a rate cut. .

“The People’s Bank (PBOC) forfeited the opportunity to lower policy rates today. This is somewhat surprising given the deep economic downturn and recent calls from Chinese leaders for monetary support,” he said. said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Most analysts, including us, were expecting a cut,” he said.

Ahead of Friday’s surprise move, investment firm KraneShares said in an overnight note that Chinese stocks rose on Thursday in anticipation of the Chinese central bank’s cut to the medium-term lending facility, as well as the bank reserve requirement ratio and the prime lending rate.

The policy easing “appears like a done deal,” KraneShares chief investment officer Brendan Ahern said in the note. He cited recent central bank comments that said downward pressure on China’s economy had increased, driven by Covid restrictions.

Premier Li Keqiang was also quoted by state media saying last week that China will step up policy measures to support the economy while considering further stimulus. Analysts had expected China’s central bank to cut borrowing costs or inject more liquidity into the economy to boost growth, according to Reuters.

The central bank also failed to release more liquidity into the system on Friday, opting to roll over more than 150 billion yuan ($23.5 billion) in medium-term loans.

“It underscores the central bank’s reluctance to aggressively ease policy,” Evans-Pritchard said of the PBOC’s action on Friday. “But we think he will have no choice but to do more before long.”

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China’s economic growth is seen as likely to slow to 5% for this year as it takes a hit from the novel Covid outbreak, a Reuters poll showed. This is below the government’s 5.5% target.

However, some analysts have pointed out that China’s central bank has limited room to raise rates due to rapidly rising consumer prices.

“Rising food and energy price inflation limits the PBOC’s room to cut interest rates, despite the rapidly deteriorating economy,” the chief economist said on Monday. from Nomura for China, Ting Lu, in a note.

– CNBC’s Evelyn Cheng contributed to this report.

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