PBOC Holds Key Interest Rate Steady

China’s central bank, the People’s Bank of China (PBOC), has kept its one-year policy lending rate, known as the medium-term lending facility (MLF), unchanged at 2.3%. This decision follows a 20-basis-point cut in July and signals a cautious approach to supporting the economy while managing financial risks.

In August, the PBOC also withdrew a net 101 billion yuan ($14 billion) from the banking system as 401 billion yuan of MLF loans expired. The central bank’s move reflects a strategy to maintain balanced liquidity and prevent excessive bond market speculation.

The decision comes amid weak demand for loans and a rare contraction in bank lending. The PBOC is walking a tightrope between stimulating economic growth and curbing a government bond-buying spree that could increase financial risks.

To address potential risks in the debt market, China has recently initiated stress tests with financial institutions on their bond investments. Economists, however, do not rule out the possibility of further easing by the PBOC, especially with expectations that the U.S. Federal Reserve may soon begin cutting rates.

In a bid to ensure ample liquidity at month-end, the PBOC injected 471 billion yuan in short-term cash through seven-day reverse repurchase agreements. Meanwhile, Chinese banks have kept their benchmark lending rates unchanged for August, cautious of narrowing profit margins.