The People’s Bank of China (PBOC) has strategically ramped up its liquidity injection while keeping interest rates steady, in line with market expectations. This decision to maintain the rate on 1.45 trillion yuan worth of one-year medium-term lending facility (MLF) loans at 2.50% reflects the central bank’s balancing act between stimulating the economy and managing currency stability.

Market analysts had anticipated this move by the PBOC, understanding the challenges posed by a weakening yuan against efforts to lower interest rates. The central bank aims to ensure ample liquidity in the banking system, offset short-term pressures such as tax payments and government bond issuances, and provide mid and long-term base money.

China’s economic recovery remains uneven, necessitating further stimulus measures. The PBOC’s latest operation resulted in a net injection of 600 billion yuan into the banking system, addressing concerns about tight liquidity conditions and the need for more robust policy support. While not reducing MLF rates, this approach is seen as crucial in supporting the nascent recovery.

Analysts foresee continued central bank vigilance in supporting economic recovery, expecting a potential interest rate cut and reserve requirement ratio (RRR) reduction in December. The PBOC’s decision to keep the one-year AAA-rated negotiable certificates of deposit (NCD) rates and MLF rates stable reflects a cautious approach to monetary policy amid fluctuating market conditions.

Despite the latest liquidity support, some traders and analysts believe that additional monetary stimulus, such as future RRR cuts, might be necessary to reduce banks’ debt costs. October’s mixed economic data, with contrasting industrial output, retail sales growth, factory activity, and consumer prices, underscores the complexity of China’s economic landscape.

The yuan’s performance, losing about 5% to the dollar this year, remains a significant concern for policymakers. Efforts to support the yuan highlight the central bank’s focus on currency stability as a foundation for monetary policy decisions and investor confidence in yuan assets.

As global central banks tighten monetary policies, China remains an outlier with its easing measures to bolster a slowing recovery. However, further rate cuts could increase the yield gap with the United States, adding pressure on the yuan and risking capital outflows.

In tandem with the MLF operation, the PBOC also injected 495 billion yuan through seven-day reverse repos, keeping the borrowing cost unchanged at 1.80%. This move further indicates the central bank’s commitment to maintaining stable and supportive monetary conditions.