China's central bank left short-term rates unchanged on Thursday, choosing not to follow a benchmark interest rate rise by the US Federal Reserve despite the risk that it could that it could put renewed pressure on the yuan.
The move by the People's Bank of China (PBOC) means that it did not immediately adjust borrowing costs for inter-bank loans after the Fed raised its key rate overnight.
While the PBOC had been expected to stand pat and has not always followed the Fed in lockstep, the decision highlights diverging policy paths for the world's largest economies.
China's economy is slowly losing momentum and is facing more pressure from escalating US trade tariffs.
The Fed, on the other hand, sees the US economy growing at faster-than-expected pace this year, with only a slight slowdown in 2019.
China has, in fact, been easing credit policies and trying to reduce financing costs in various ways in recent months as economic activity has softened and US trade threats mount.
The PBOC also said it had skipped open market operations on Thursday as liquidity levels in the banking system were "relatively high".
It did not mention interest rates on reverse repos in a statement on the its website, but attributed "relatively high" liquidity levels to quarter-end fiscal expenditures, which could "absorb factors including maturing reverse repos and government bond issuance".
China has currency and capital flow controls in place, and there remains a gap in interest rates between the China and United States, Sheng added.
The PBOC had followed a Fed hike in March by bumping up its short- and medium-term rates, but held its fire in June despite US tightening.
The interest rate on China's benchmark bond is about 61 basis points (bps) higher than its US counterpart . In June, the gap was more than 70 bps, and any further narrowing could risk a resurgence of outflows from China.
The Fed foresees another rate hike in December, three more next year, and one increase in 2020.
The interest rate for seven-day reverse repurchase agreements stood at 2.55 percent in the last cash injection on September 20, while market rates largely swung in a range of 2.55 to 2.7 percent in recent months.
Reverse repos are one of its most commonly used tools to control liquidity in the financial system.