Analysts review economic headwinds after 1-yr MLF bags 200b yuan at 2.85%

Although the People's Bank of China has kept key rates unchanged so far this month, current economic headwinds might still persuade the country's central bank to cut key policy interest rates in the second quarter of the year, experts said on Tuesday.

Their remarks were in response to the PBOC's open market operations on Tuesday, which infused 200 billion yuan ($31.36 billion) into the financial system through a one-year medium-term lending facility at an unchanged interest rate of 2.85 percent.

Tuesday's OMO also signaled the PBOC's intention to boost credit expansion, as it has injected a net 100 billion yuan in mid-to-long-term liquidity into financial institutions after subtracting the 100 billion yuan of MLF due on Tuesday.

In addition, seven-day reverse repos at an unchanged yield of 2.1 percent injected 10 billion yuan into the system.

The moves appear to have cooled expectations that the PBOC will cut the key policy rate this month to boost credit expansion.

The PBOC last cut the one-year MLF interest rate by 10 basis points to 2.85 percent in January, after which economic activity showed more signs of stabilization.

Ming Ming, co-chief economist of CITIC Securities, said any absence of a rate cut this month could mean the PBOC may take some more time to observe the effects of previous easing measures, given the mixed bag of weaker credit demand and stronger-than-expected economic activities.

"Given the government's firm objectives of stabilizing economic growth and boosting credit expansion, there will remain room for further monetary easing, but an interest rate cut may await stronger catalysts and a better timing," Ming said.

Meanwhile, the National Bureau of Statistics said on Tuesday that industrial output, a key economic gauge, expanded by 7.5 percent year-on-year in the first two months, compared with a 4.3 percent rise in December.

PBOC data released on Friday, however, showed demand from the real economy may have remained sluggish. Renminbi loans rendered to the real economy expanded by 908.4 billion yuan last month, 432.9 billion yuan less than the increase in February 2021.

Specifically, new mid-to-long-term loans to households even registered a rare decline of 45.9 billion yuan in February, reflecting the weakness of the property sector, PBOC data showed.

Wang Qing, chief macroeconomic researcher at Golden Credit Rating International, said economic downward pressure could intensify and necessitate an interest rate cut in the second quarter.

"The possibility of reducing the MLF interest rate by another 10 basis points is rising," Wang said, adding it is necessary for monetary policy to ramp up support to offset headwinds facing consumption growth and the property sector as well as effects from rising domestic COVID-19 cases.

Lu Ting, Nomura's chief China economist, said he believes there is a "reasonably high likelihood" for the PBOC to cut the one-year MLF rate by around 10 basis points in April.

The State Council's executive meeting on Monday encouraged financial institutions to roll out specific measures to make substantive progress in making financing truly accessible to micro-, small and medium-sized enterprises-MSMEs-and reducing overall financing costs.