China’s central bank keeps medium-term lending rates steady as the yuan weakens

China kept its medium-term lending rate on hold on Monday, signaling the central bank’s focus on stabilizing the yuan as currency pressures were added by Donald Trump’s victory in the US presidential election.

The People’s Bank of China (PBOC) has left the Medium-Term Lending Facility (MLF) interest rate unchanged at 2 percent for 900 billion yuan ($124.26 billion) in one-year loans to select financial institutions, an official statement said the bank.

During Monday’s trading, bid rates ranged from 1.90 to 2.30 percent, with total MLF loans currently at 6.239 trillion yuan, the central bank said.

Wang Tao, chief China economist at UBS Investment Bank, told CNBC that the MLF rate will remain at 2 percent this year before falling to 1.2 percent by the end of 2025 and further to 1.0 percent in 2026.

Zhiwei Zhang, president of Pinpoint Asset Management, also believes the PBoC will hold off on further interest rate cuts until the new US administration takes office in January. As a result, higher tariffs could be imposed on Chinese exports.

Zhang noted that the sharp appreciation of the US dollar was weighing on international currencies such as the renminbi (RMB), and said the central bank was unlikely to be in a rush to cut interest rates. .

Since the US presidential election on November 5, the offshore yuan has fallen more than 2 percent.

The exchange rate of Yuan against the dollar continues. The offshore currency has lost about 3.3 percent since September 24, when Beijing announced the first round of stimulus measures to support the slowing economy. On Monday, the offshore yuan traded at 7.2472.

Gary Ng, senior economist at Natixis, said the PBoC would likely be cautious and assess the results of its policies step by step.

While China may prefer a weaker yuan to boost exports, Ng said authorities would seek a gradual devaluation rather than sudden shocks.

Last week, the central bank left key interest rates on 1- and 5-year loans unchanged at 3.1% and 3.6%, respectively.

The 1-year LPR primarily affects corporate and home loans, while the 5-year LPR is the benchmark for mortgages.

Economists expect that the PBoC may lower the reserve ratio for commercial banks in the coming months to strike a balance between economic recovery and exchange rate stability.

PBOC Governor Pan Gongsheng had previously indicated that the reserve requirement ratio could be reduced by 25 to 50 basis points by the end of the year, depending on liquidity conditions.

Pan also suggested a possible 20 basis point cut in the seven-day repo rate before the end of the year, stressing that the PBoC relies on a diversified interest rate regime to implement its monetary policy, while the US Federal Reserve focuses primarily on key. interest rate.