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China's central bank maintains record low rates despite economic concerns

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2023-12-21

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China's central bank left its last two key indicator rates steady at all-time lows on Wednesday, despite November's economic data dump—especially housing and inflation figures—continuing to suggest that the economy remains moribund.

The People's Bank of China (PBoC) kept its one and five-year lending rates steady at the December fixing. The one-year loan prime rate (LPR), used for corporate and household loans, remained unchanged at a record low of 3.45% for the fourth consecutive month. The five-year rate, a reference for mortgages, was held at 4.2% for the sixth straight month.

Wednesday's decision followed the central bank's boost in medium-term liquidity last Friday while keeping the one-year medium lending facility rate (MLF) interest rate unchanged. The key move, however, was the largest-ever liquidity injection reported from China's central bank: the PBoC injected a net 800 billion yuan ($US1.1 billion) of fresh funds into the banking system, marking the biggest medium-term liquidity monthly injection on record.

Monthly data from the National Bureau of Statistics confirmed that the state of the property sector continues to worsen, with new home prices falling the most in seven months in November, despite Beijing issuing a series of measures to boost demand. Sales, investment, and new funds raised by property companies also remained weak.

While the yuan strengthened by 2.55% in November, the exchange rate is still down 3.4% year-to-date. The primary concern, however, remains deflation. Falling pork prices contributed significantly to the 0.5% drop in the Consumer Price Index (CPI) in November, and for the year to November. Producer prices resumed falling in November, down 3%, despite expectations of a small improvement.

Core CPI rose 0.6% in November from October (excluding food and energy), suggesting that there is some activity driving prices higher outside of food, especially.

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