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Unexpectedly, China refrains from cutting key interest rates

The metropolis of Shanghai, home to many foreign companies, fell into a two-part blockade this week as municipal authorities tried to control the outbreak in China’s worst wave of Covid in two years.

Hector Retamal Afp | Getty Images

China’s central bank kept the key interest rate unchanged on Friday in a surprising move, despite expectations of more stimulus as Beijing struggles with Covid’s jump.

The People’s Bank of China said it kept the interest rate on its one-year medium-term loan unchanged at 2.85%.

The Asian giant is facing its worst Covid epidemic since the pandemic began in late 2019 as it blocked key cities such as Shanghai.

Massive blockages have sparked predictions that GDP growth will fall below the government’s 5.5% target for this year, prompting some economists and analysts to expect interest rates to fall.

“The National Bank (PBOC) missed the opportunity to lower interest rates today. This is somewhat surprising, given the sharp economic downturn and recent calls from the Chinese leadership for financial support, “said Julian Evans-Pritchard, a senior Chinese economist at Capital Economics.

“Most analysts, including us, expected a reduction,” he said.

Ahead of Friday’s surprise decision, investment firm KraneShares said in a one-night note that Chinese stocks rose on Thursday in anticipation of China’s central bank reducing the medium-term credit facility, as well as the ratio of required bank reserves to key loan interest rates.

Easing the policy “feels like a done deal,” KraneShares Chief Investment Officer Brendan Ahern said in a note. He quoted recent comments from the central bank as saying that the pressure to cut China’s economy had increased, driven by Covid’s restrictions.

Premier Li Keqiang was also quoted by state media as saying last week that China would step up political measures to support the economy while seeking new incentives. Analysts had expected China’s central bank to cut borrowing costs or put more money into the economy to boost growth, according to Reuters.

The central bank also released no more money on Friday, choosing to repay medium-term loans worth 150 billion yuan ($ 23.5 billion).

“This underscores the central bank’s reluctance to aggressively ease policy,” Evans-Pritchard said of the NBK’s actions on Friday. “But we think there will be no choice but to do more after a long time.”

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China’s economic growth is thought to slow to 5% this year as it takes the brunt of Covid’s renewed epidemic, a Reuters study found. This is below the government’s 5.5% target.

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

“Rising food and energy inflation is limiting the scope for the PBOC to cut interest rates, despite a rapidly deteriorating economy,” Nomura’s chief Chinese economist Ting Lu said in a note Monday.

– Evelyn Cheng of CNBC contributed to this report.