Chinese Central Bank Lifts MLF Volume, Domestic Analysts Say Monetary Policy Will Remain “Independent” amidst Overseas Tightening

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The People’s Bank of China (PBOC) has lifted its balance of medium-term lending facilities (MLF) basis in its latest round of open market operations, with domestic analysts pointing to the maintenance of a loose monetary policy stance compared to other central banks.

On 15 February PBOC announced that it would undertake 300 billion yuan in MLF operations and 10 billion yuan in 7-day reverse-repo operations, for the purpose of “keeping liquidity in the banking system rationally ample.”

Given that 200 billion yuan in MLF are scheduled to mature on 18 February, the volume of MLF operations conducted on 15 February marks an increase of 100 billion yuan in the outstanding volume of instruments this week.

The rates for both MLF and 7-day reverse repos remained unchanged, at 2.85% and 2.1% respectively.

Tao Jin (院金), a senior researcher with the Suning Financial Research Institute, said to state-owned media that MLF rates were not expected to change following a recent cut that has since translated into declines in the cost of both short-term and long-term funds.

Wang Qing (ηŽ‹ι’), chief macro-analyst with Golden Credit Rating, said that the MLF rate remaining unchanged means that China’s benchmark loan prime rate (LPR) is set to stay the same in February.

Wang further points out that China will continue to maintain comparatively loose monetary policy when compared to central banks around the world, who are expected to pursue strenuous tightening to deal with inflationary pressure.

“Different from overseas where the heating up of inflation is forcing the tightening of monetary policy, in China inflationary pressure is under control overall,” said Wang.

“However, affected by factors including pandemic volatility and cooling down of the real estate market, macro-economic growth drivers are easing.

“For this reason monetary policy will strengthen its sovereignty and independence, and will not following the tightening overseas. There is also room for marginal loosening.”

Wang says there is some possibility of further rate declines and a reduction in the required reserve ratio in China in the first half of 2022.