China’s central bank is expected to leave a medium-term interest rate unchanged and reduce cash from the banking system when rolling over such maturing loans on Monday. While the economy remains unstable, the weak Chinese currency has remained a major concern limiting any easing to the monetary policy. Hence, that could further widen the yield gap with other major economies, particularly the United States, and trigger more capital outflows.
Markets believe that the significance of the medium-term lending facility (MLF) rate will decline as the People’s Bank of China (PBOC) tries to improve the effectiveness of its interest rate corridor. The central bank introduced a new cash management system this week. In addition, the central bank governor recently stated that the seven-day reverse repo rate fulfills the function of the main policy rate.
Market participants also expect the central bank to only conduct a partial rollover, compared to $14.18 billion worth of medium-term lending facility loans due this month.
Bond traders noted that the demand for medium-term lending facilities has declined due to loosening cash conditions in the banking system.
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The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measures short-term interbank borrowing costs, stayed well below the medium-term lending facility rate, last trading at 1.9642 percent.
In addition to taking a medium-term interest rate decision, China’s central bank has introduced several new measures including plans to sell treasury bonds to control the bond rally.
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