China keeps interest rates stable despite COVID, Ukraine’s problems | Business and economics
China keeps interest rates stable despite COVID, Ukraine’s problems |  Business and economics

China keeps interest rates stable despite COVID, Ukraine’s problems | Business and economics

The People’s Bank of China holds the one-year prime rate at 3.7 percent and the five-year rate at 4.6 percent.

China kept policy rates on corporate and household loans stable on Wednesday, a surprising move signaling that Beijing remains cautious about political easing, despite COVID-19 and the Ukraine war weighing on growth.

The People’s Bank of China (PBOC) kept the one-year prime rate at 3.7 percent and the five-year rate at 4.6 percent.

Most economists, including a majority of the 28 traders and analysts surveyed by a quick poll by Reuters this week, had expected the central bank to cut interest rates due to declining economic growth due to COVID-19 shutdowns and the conflict in Europe.

The central bank’s benchmark interest rates affect the costs of new and outstanding loans and mortgages, respectively.

“At this stage, China can take a wait-and-see approach given the uncertainty, such as the COVID-19 situation and its impact on the economy,” said Heng Wang, an expert on Chinese economics at the University of New South Wales, Al Jazeera.

“These considerations may include how such lending rates would boost the economy effectively. Controlling inflation and debt is an important issue.”

Monetary easing

While central banks in North America, Europe and Asia are raising interest rates to tame rising inflation, China has launched easing measures to support growth.

On Friday, the PBOC reduced the amount of deposits that banks must hold in reserve – known as reserve requirements (RRR) – and released about 530 billion yuan ($ 82 billion) of liquidity to the economy while keeping its medium-term key policy rate unchanged. The RRR reduction of 0.25 percentage points was largely considered not to live up to market expectations.

Carlos Casanova, senior economist for Asia at UBP in Hong Kong, said the decision to keep interest rates stable had been signaled by the modest RRR cut and the decision to keep the medium-term borrowing rate unchanged.

“The PBOC is probably concerned that reducing rates at this time would not do much to support activity, as many cities around the country are subject to varying degrees of closure measures,” Casanova told Al Jazeera.

“Moreover, as China’s interest rate differential vis-à-vis the US is effectively eradicated by rapidly rising US interest rates, the PBOC may be concerned about a mistiming of policy stimuli. This could result in portfolio outflows and yuan depreciation without the desired impact on growth.”

Casanova said politicians could opt for modest interest rate cuts in May or June after the impact of shutdowns became apparent, or rely on more targeted measures such as RRR cuts and mortgage cuts.

“The second scenario is more likely, but will result in fewer upside risks in the second half,” he said.

China’s economy grew 4.8 percent year-on-year in the first quarter, according to government data released Monday. While beating the forecasts, the figure covers only a small period of the ongoing shutdown in Shanghai, which has caused food shortages and rare displays of civil unrest. Industrial production rose 5 percent in March compared to a year earlier, according to data, while retail sales fell 3.5 percent.

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