China's central bank will keep key interest rates unchanged on Friday amid uncertainty over the Fed's easing policy

Amid uncertainty over the timing of the Fed's rate cut, the People's Bank of China is expected to keep key policy rates unchanged when it rolls over maturing medium-term loans on Friday.

Market observers generally believe that Beijing will continue to prioritize the stability of the yuan, despite widespread agreement that the struggling economy needs more stimulus.

Cutting interest rates before the Fed or other major central banks take action would widen yield differentials and could put more pressure on the yuan. Despite the central bank's continued efforts to support the yuan, the yuan has depreciated 1.3% against the dollar so far this year.

"We maintain our view that the People's Bank of China will not cut rates ahead of the Fed," said DBS economist Samuel Tse.

"After all, the authorities aim to stabilize the exchange rate to prevent further capital outflows. Stabilizing economic data also leaves room for delaying a decision to cut interest rates."

The Fed is widely expected to cut interest rates this year if inflation cools, with markets currently pricing in a 65% chance of a rate cut in June, according to LSEG's Rate Probability app, although that's down from 71% earlier this week. dropped. The chance of a rate cut in July is about 83%.

Traders and analysts said a rate cut or series of rate cuts by the Federal Reserve would give China's central bank room to maneuver to lower borrowing costs to support economic growth.

A bond fund manager in Beijing said that "China's policy interest rate adjustment may have to wait until the timing of the U.S. interest rate cut is clear." He expects the central bank to fully roll over maturing MLF loans and even provide some new funds to the market. Financial system on Friday.

However, Pan Gongsheng, the governor of the People's Bank of China, said last week that the bank would keep the yuan basically stable and sent a dovish message to the market, saying China "has abundant monetary policy tools."

"We expect China to introduce more loose monetary policies to support economic growth," Barclays economists said in a note.

"We expect policy rates to be cut by 10 basis points in both the second quarter and third quarter, and expect the bank reserve ratio (RRR) to be cut by 25-50 basis points in the second quarter and by another 25-50 basis points in the third quarter."