China holds rates steady despite calls for stimulus

China’s central bank maintained its key interest rate on Wednesday, defying expectations for a cut in the face of a slowing economy, according to Reuters.

The decision to keep the medium-term lending facility (MLF) rate at 2.5 per cent comes as policymakers grapple with conflicting priorities: supporting growth and maintaining currency stability.

This measured approach reflects concerns about a weakening yuan, which has fallen nearly two per cent against the strengthening US dollar so far this year. Lowering rates could further depreciate the yuan, potentially triggering capital flight.

The move comes despite calls for stimulus following a surprise contraction in credit growth last month. Economists point to weak inflation, slowing money supply, and sluggish private investment as reasons for a rate cut.

The case for easing is strong, said ING economists in a pre-decision note. However, currency stability remains a priority, and policymakers may prefer to see global rate cuts first, they added.

The central bank’s decision follows a pledge by the Politburo in April to bolster the economy with monetary and fiscal measures, including potential interest rate reductions and cuts in bank reserve requirements.

The next move for China’s central bank remains to be seen. With a focus on balancing growth and currency stability, policymakers face a delicate act in the coming months.