Earlier today, the PBOC held interest rates on one-year MLF loans steady at 3.25% but injected 300 billion yuan via this liquidity tool. In addition, China’s central bank also extended 100 billion yuan via 14-day reverse repos at an unchanged interest rate of 2.65%.
The fresh infusion of funds was aimed at offsetting any possible impact from tax payment and cash demand, and to keep ample liquidity in the markets available ahead of an upcoming long holiday. The week-long Lunar New Year holidays start a week from next Friday and are expected to spur the demand for cash among businesses as well as households.
The PBOC depends on the MLF rate to set the new lending benchmark Loan Prime Rate (LPR) every month. Markets anticipate the central bank to cut LPR by as much as 5bp in the near future. Over the past year, the LPR has already undergone a 10bp cut to reduce corporate borrowing costs in a bid to boost economic growth via increased spending.