SHANGHAI: The yuan held steady against the US dollar on Friday after China’s central bank left a key policy rate unchanged, preventing the yield gap from widening further

As expected, the People’s Bank of China (PBOC) said it was keeping the rate on the one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.

While analysts believe much more stimulus is needed to get the struggling economy back on its feet, cutting rates before a widely expected move by the Federal Reserve would widen yield differentials, potentially putting more pressure on the yuan, which has depreciated 1.3% against the dollar so far this year.

China’s 10-year treasury bond yield dropped 2 basis points after the MLF decision, despite the rate being kept unchanged.

China’s yuan inches lower, markets await US data and PBOC rate decision

“Our call for PBOC to potentially cut rates today was thrown off course by inflation prints from the US which had surprised to the upside,” Maybank analysts said.

US Treasury yields and the dollar index rose overnight after the stronger-than-expected producer price index (PPI) cast doubt on the timing and size of rate cuts from the Fed this year.

Market participants are still greatly concerned about China’s property crisis.

New home prices dropped for an eighth straight month in February, despite a slew of measures to shore up the fragile sector.

Most analysts are still expecting one or two more cuts in prime rates and another reduction in banks’ reserve requirement ratio (RRR) this year.

Prior to the market’s opening, the PBOC set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.0975 per US dollar, only 1 pip weaker than the previous fix of 7.0974.

Spot yuan opened at 7.1947 per dollar and was changing hands at 7.1965 at midday, 15 pips weaker than the previous late session close.

The global dollar index rose to 103.467 from the previous close of 103.36.

The offshore yuan was trading 77 pips weaker than the onshore spot at 7.2042 per dollar.